3 Stocks Goldman Sachs Says Are Ready to Rip Higher

Firing on all cylinders since its March low, where is the stock market going? Not just in the back half of 2020, but ten years down the line. Going beyond the near-term, the strategists at Goldman Sachs, led by David Kostin, looked at valuations, bond market forecasts, investor allocations, dividend growth expectations as well as the outlook for the economy to gauge the market’s trajectory over the next decade.

“We estimate the S&P 500 will deliver an average annualized total return of 6% during the next 10 years... We estimate 25% of the return will come from dividends and 75% from price gains,” Kostin commented.

That said, the strategist acknowledges there’s some uncertainty when it comes to any long-term projection. Additionally, Goldman Sachs highlights five potential risks to watch out for including deglobalization, taxes, labor costs, demographics as well as index turnover, with the S&P 500’s average rate of turnover per decade landing at 35% since 1980.

Taking Kostin’s outlook into consideration, we used TipRanks’ database to take a closer look at three stocks Goldman Sachs’ analysts believe can rip at least 25% higher.

PG&E Corporation (PCG)

Operating through its main subsidiary, Pacific Gas and Electric Company, PG&E provides natural gas and electric service to millions of people living in northern and central California. Following its Q2 2020 print, Goldman Sachs likes what it’s seeing.

Analyst Michael Lapides cites its lower financing costs, including lower equity issuances, updated operating costs not recovered in rates, lower capital spend and rate base growth as the reasons for his more optimistic take. To this end, his 2020 estimate gets a boost, with the EPS forecast increasing from $0.99 to $1.60.

Going forward, Lapides told clients, “We still see normalized EPS occurring in 2022, with a step up driven by less equity financing year-over-year as well as earnings that reflect allowed returns on rate base and lower holding company debt balances and interest costs.” So, while the 2021 estimate for EPS is revised to the downside, the figure gets a lift for 2022.

When it comes to PCG’s equity needs, management stated that the number for 2021 should land within the range of $450-$750 million, assuming it receives a $7.5 billion securitization approval from the CPUC and no additional equity is needed beyond 2021.

“We note this compares to our original estimates of $1 billion in annual issuance in both 2021 and 2022— which we now trim to $750 million/$500 million, recognizing our forecasts may prove conservative. Our estimates now come in 5%/4% above consensus in 2021/2022,” Lapides mentioned.

On top of this, the Goldman Sachs analyst argues its valuation is compelling. On 2021 P/E, PCG trades at 9x versus large-cap regulated utilities at 19x and California peer Edison International at 12x, reflecting a “meaningful discount.”

All of the above makes Lapides a PCG bull. As a result, he continues to assign a Buy rating to the stock. Bumping up the price target from $14 to $15, a potential twelve-month gain of 50% could be in the cards. (To watch Lapides’ track record, click here)   

The bulls represent the majority on this one. Out of 13 total reviews published in the last three months, 8 analysts rated the stock a Buy, while 5 said Hold. So, the word on the Street is that PCG is a Moderate Buy. The $13.05 average price target implies shares could climb 40% higher in the next twelve months. (See PG&E stock analysis on TipRanks)

Tapestry Inc. (TPR)

Housing several well-known luxury fashion brands like Kate Spade, Coach and Stuart Weitzman, Tapestry prides itself on the quality and craftsmanship of its products. While shares have taken a 50% tumble year-to-date, Goldman Sachs thinks that this weakness presents a unique buying opportunity.

Covering the stock for the firm, analyst Alexandra Walvis points out recent data from the accessories and luxury industries along with TPR’s latest press releases suggest that promotional activity was better than expected, and thus, there’s near and medium-term gross margin upside. In addition, the data also makes her more optimistic about near-term sales.

“We believe this is due to several factors, including product strategy and newness at Coach, favorable category exposure (where accessories have more ‘evergreen’ products) and a more consolidated market share category... TPR’s ability to lower promotional intensity year-over-year is a positive signal, and we believe is indicative of solid brand positioning in a relatively attractive category,” Walvis commented.

Adding to the good news, Walvis believes that TPR’s high DTC mix, low reliance on challenged department store partners and its solid standing in China make it better-positioned than other apparel vendors, namely its main competitor, Capri Holdings.

Speaking to the opportunity in China, Walvis explained, “TPR has proactively expanded its direct China business, involving business takebacks across brands, new ecommerce initiatives, specialized product launches and other strategies, as management has acknowledged secularly declining tourist spend. China now accounts for ~15% of sales at TPR, and we see the company as well-positioned to recapture some tourist spend as the Chinese consumer spends more in their domestic market.”

It should be noted that TPR is exposed to decelerating tourist spend, but this exposure is lower than Capri’s, in Walvis’ opinion. However, since March 15, Capri has outperformed TPR. That being said, Walvis thinks “a material discount to historical levels is justified as TPR faces material macro headwinds, TPR’s lagging stock price performance and valuation vs. our apparel coverage creates an attractive buying opportunity in our view.”

With TPR’s balance sheet and liquidity access also remaining strong despite the pandemic, the deal is sealed for Walvis. To this end, she upgraded the stock from Neutral to Buy and gave the price target a boost, raising it from $16 to $18. This target indicates shares could surge 35% in the next year. (To watch Walvis’ track record, click here)  

Looking at the consensus breakdown, opinions are split almost evenly. 2 Buys and 3 Holds add up to a Moderate Buy consensus rating. In addition, the $16.25 average price target brings the upside potential to 22%. (See Tapestry stock analysis on TipRanks)

Kontoor Brands Inc. (KTB)

Last but not least we have Kontoor Brands, another apparel company that boasts iconic brands. These include the likes of Wrangler and Lee. Now singing a different tune, Goldman Sachs believes that now is the right time to get on board.

Analyst Alexandra Walvis, who also covers TPR, tells investors that several potentially negative catalysts as well as KTB’s outperformance earlier on in the pandemic drove her cautious approach. Now that these catalysts, which included estimate revisions, the potential for a dividend cut and a deleverage of its fixed manufacturing cost base, have played out, she is much more optimistic going forward.

“Looking ahead, we now expect news flow and estimates to inflect positively. With a stronger-performing wholesale partner network, new distribution on the horizon, and an owned supply chain providing flexibility to fulfill just-in-time orders, we see KTB as best positioned relative to apparel wholesale peers to navigate the marketplace into 2H20,” Walvis explained.

When it comes to its wholesale partner network, KTB has a much higher exposure to mass and online retail channels compared to its peers. It should also be noted that these distributors have seen a faster return to normalized apparel sales versus mall-based department stores. This means there’s “scope for Q2/2H to surprise to the upside,” in Walvis’ opinion.

As for its manufacturing network, Walvis stated, “As retailers react to rapidly changing consumer demands, we see KTB’s fast and flexible owned manufacturing network as a key enabler of stronger 2H sales.”

Going back to those catalysts, ultimately, there was a dividend cut and fixed cost deleverage, which drove its more recent underperformance. However, Walvis sees potentially positive upcoming catalysts including earnings revisions (in Q2/Q3), significant new sales distribution in both the U.S. and internationally and the possibility of a dividend reinstatement.  

To this end, in addition to upgrading the rating from Sell to Buy, Walvis lifted the price target from $17 to $24. What does this mean for investors? Upside potential of 25% is on the table. 

Other analysts are still taking a cautious approach. KTB's Hold consensus rating breaks down into 4 Buys, 3 Holds and 2 Sells. Yet, at $25, the average price target implies shares could rise 30% in the year ahead. (See Kontoor Brands stock analysis on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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