GOLDMAN SACHS: Buy these 37 stocks that could earn you the strongest returns without taking on big risks in 2021 as the recovery and vaccine distribution get underway

  • The S&P 500 rose by over 15% in a year that saw its fastest plunge into a bear market in history and its highest one-month realized volatility since Black Monday. 
  • Heading into 2021, three major factors — the challenges associated with vaccine distribution, higher inflation and interest rates, and the January 5 Georgia run-off — could again ramp up volatility.
  • As such, Goldman Sachs rebalanced its High Sharpe Ratio basket and introduced 37 new stocks that could deliver the strongest risk-adjusted returns in 2021.  
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Even in a year as unprecedented as 2020, the S&P 500 index still managed to rise by over 16%. 

But the gains were generated with extreme volatility. In March, stocks plunged into the fastest bear market in history and the S&P 500 one-month realized volatility surged to its highest level during the past 70 years, matching that of Black Monday on October 19, 1987.

Looking into 2021, a number of risks could derail Wall Street's positive forecasts for the year and bring back the volatility that has since faded somewhat in the new bull market. 

Goldman Sachs' chief equity strategist David Kostin and his team are highlighting three potential downside risks to their optimistic equity market forecast. 

First off, the biggest risk would be that the vaccine distribution does not go as smoothly or have the expected economic impact.

Whether it's the complexities of logistics or the potential mismatch between the supply and demand of doses, any uncertainty there would result in a slower-than-expected rebound in consumer activity, Kostin and his team said in a December 18 client note. 

Second, fiscal and monetary policy could also drive a sharper-than-expected rise in inflation and interest rates. 

"In their inflation outlook, our economists project that inflation should remain soft due to slack in the labor and product markets," Kostin said in the note. "However, some investors have expressed concern that rebounding economic activity, additional fiscal stimulus, and sustained Fed asset purchases could lead to a spike in inflation and a rise in Treasury yields during 2021."

Lastly, while the US presidential election already seems like a thing of the past, the January 5 Georgia Senate run-off could create enormous policy uncertainty if a Democratic sweep materializes. 

"The options market currently reflects a clear jump in volatility around the January 5th election," Kostin noted. 

With all three factors pointing to a potential spike in volatility next year, it is all the more important to manage risk on the portfolio and stock level. 

As such, Goldman Sachs rebalanced its High Sharpe Ratio basket, which consists of 50 stocks with the highest prospective risk-adjusted returns, meaning these stocks are expected to generate the highest profit without taking huge risks. 

Goldman Sachs defines a stock's prospective Sharpe Ratio as "the return to the consensus 12-month price target divided by 6-month option-implied volatility."

The value-tilted basket has lagged the S&P 500 by about four percentage points as of December 17, but it has a long-term track record of outperformance. Since 1999, the 50-stock portfolio has beaten the S&P 500 in 64% of semiannual periods by an average of 263 bp (roughly 526 bp annually), according to the research note. 

Its average excess return ranks in the 83rd percentile of large-cap core mutual funds since 1999, as illustrated by the chart below. 

"The median constituent is expected to post 3x the return as the median S&P 500 stock with modestly lower volatility, resulting in 3x the prospective risk-adjusted return (0.5 vs. 0.2)," said Kostin of the typical stock in the basket. 

After the rebalancing, the 50-stock, sector-neutral, equal-weighted High Sharpe Ratio basket of stocks has added 37 new constituents while maintaining the 13 existing stocks.

The remaining stocks are Charter Communications (CHTR), Assurant (AIZ), Hartford Financial Services (HIG), Allstate (ALL), Merck (MRK), Centene (CNC), Cigna (CI), Boston Scientific (BSX), Northrop Grumman (NOC), Lockheed Martin (LMT), Fiserv (FISV), Fidelity National Info Services (FIS), Motorola Solutions (MSI).

The newly-added 37 stocks, along with their tickers, market capitalizations, and prospective Sharpe Ratios (as of December 17), are listed below. 

1. T-Mobile US

Ticker: TMUS

Market cap: $164.98 billion 

Prospective Sharpe ratio: 0.6

Source: Goldman Sachs

 

2. Dish Network

Ticker: DISH

Market cap: $16.65 billion

Prospective Sharpe ratio: 0.5

Source: Goldman Sachs

3. Facebook

Ticker: FB

Market cap: $787.07 billion 

Prospective Sharpe ratio: 0.5

Source: Goldman Sachs

4. Alphabet

Ticker: GOOGL

Market cap: $1.187 trillion 

Prospective Sharpe ratio: 0.3

Source: Goldman Sachs

5. Activision Blizzard

Ticker: ATVI

Market cap: $70.50 billion

Prospective Sharpe ratio: 0.3

Source: Goldman Sachs

6. O'Reilly Automotive

Ticker: ORLY

Market cap: $32.74 billion 

Prospective Sharpe ratio: 0.6

Source: Goldman Sachs

7. AutoZone

Ticker: AZO

Market cap: $26.75 billion 

Prospective Sharpe ratio: 0.6

Source: Goldman Sachs

8. McDonald's

Ticker: MCD

Market cap: $158.24 billion 

Prospective Sharpe ratio: 0.6

Source: Goldman Sachs

9. Lowe's Companies

Ticker: LOW

Market cap: $117.44 billion 

Prospective Sharpe ratio: 0.5

Source: Goldman Sachs

10. Best Buy

Ticker: BBY

Market cap: $26.05 billion 

Prospective Sharpe ratio: 0.5

Source: Goldman Sachs

11. eBay

Ticker: EBAY

Market cap: $35 billion 

Prospective Sharpe ratio: 0.5

Source: Goldman Sachs

12. Kimberly-Clark

Ticker: KMB

Market cap: $45.55 billion 

Prospective Sharpe ratio: 0.6

Source: Goldman Sachs

13. Tyson Foods

Ticker: TSN

Market cap: $22.68 billion 

Prospective Sharpe ratio: 0.6

Source: Goldman Sachs

14. Procter & Gamble

Ticker: PG

Market cap: $342.67 billion 

Prospective Sharpe ratio: 0.5

Source: Goldman Sachs

15. Cabot Oil & Gas

Ticker: COG

Market cap: $6.4 billion 

Prospective Sharpe ratio: 0.7

Source: Goldman Sachs

16. Nasdaq

Ticker: NDAQ

Market cap: $21.15 billion 

Prospective Sharpe ratio: 0.5

Source: Goldman Sachs

17. Moody's

Ticker: MCO

Market cap: $52.64 billion 

Prospective Sharpe ratio: 0.5

Source: Goldman Sachs

18. Regeneron Pharmaceuticals

Ticker: REGN

Market cap: $51.59 billion 

Prospective Sharpe ratio: 1.0

Source: Goldman Sachs

19. Bristol-Myers Squibb

Ticker: BMY

Market cap: $138.57 billion 

Prospective Sharpe ratio: 0.8

Source: Goldman Sachs

20. Gilead Sciences

Ticker: GILD

Market cap: $71.12 billion 

Prospective Sharpe ratio: 0.7

Source: Goldman Sachs

21. Masco

Ticker: MAS

Market cap: $14.28 billion 

Prospective Sharpe ratio: 0.7

Source: Goldman Sachs

22. Republic Services

Ticker: RSG

Market cap: $30.43 billion 

Prospective Sharpe ratio: 0.5

Source: Goldman Sachs

23. Citrix Systems

Ticker: CTXS

Market cap: $15.99 billion 

Prospective Sharpe ratio: 0.7 

Source: Goldman Sachs

24. Akamai Technologies

Ticker: AKAM

Market cap: $17.34 billion 

Prospective Sharpe ratio: 0.6

Source: Goldman Sachs

25. Salesforce.com

Ticker: CRM

Market cap: $203.22 billion

Prospective Sharpe ratio: 0.6

Source: Goldman Sachs

26. IBM

Ticker: IBM

Market cap: $110.13 billion

Prospective Sharpe ratio: 0.4

Source: Goldman Sachs

27. Adobe

Ticker: ADBE

Market cap: $240.48 billion

Prospective Sharpe ratio: 0.4

Source: Goldman Sachs

28. Juniper Networks

Ticker: JNPR

Market cap: $7.3 billion 

Prospective Sharpe ratio: 0.4

Source: Goldman Sachs

29. Cisco Systems

Ticker: CSCO

Market cap: $188.32 billion

Prospective Sharpe ratio: 0.3

Source: Goldman Sachs

30. Microsoft

Ticker: MSFT

Market cap: $1.692 trillion

Prospective Sharpe ratio: 0.3

Source: Goldman Sachs

31. Analog Devices

Ticker: ADI

Market cap: $52.99 billion

Prospective Sharpe ratio: 0.3

Source: Goldman Sachs

32. Visa

Ticker: V

Market cap: $500.23 billion 

Prospective Sharpe ratio: 0.3

Source: Goldman Sachs

33. Skyworks Solutions

Ticker: SWKS

Market cap: $24.94 billion 

Prospective Sharpe ratio: 0.3

Source: Goldman Sachs

34. Newmont

Ticker: NEM

Market cap: $47.91 billion 

Prospective Sharpe ratio: 0.9

Source: Goldman Sachs

35. American Tower

Ticker: AMT

Market cap: $97.78 billion 

Prospective Sharpe ratio: 1.0

Source: Goldman Sachs

36. NRG Energy

Ticker: NRG

Market cap: $8.67 billion 

Prospective Sharpe ratio: 1.1

Source: Goldman Sachs

37. Entergy

Ticker: ETR

Market cap: $19.34  billion 

Prospective Sharpe ratio: 0.7

Source: Goldman Sachs

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