The corporate earnings reporting season for 3Q 2019 is expected to be in full swing by Oct. 15, and preliminary estimates are decidedly downbeat. Goldman Sachs projects that EPS for the S&P 500 as whole will be down by 3% versus the same period in 2018, while S&P data cited by research firm CFRA is even gloomier, forecasting a 4% decline. Rapidly rising costs are more than offsetting revenue increases in the aggregate.
Against this challenging macro backdrop, Goldman recommends a basket of 50 “Stable Growers,” stocks that have shown considerably more consistent profit increases over the past 10 years, as measured by EBITDA, than the median Russell 1000 stock. “Our new Stable Growers basket typically outperforms when uncertainty rises and growth slows,” Goldman observes in the latest edition of their US Weekly Kickstart report.
This is the second of two stories that Investopedia is publishing about Goldman’s findings. Here are seven more stocks in their stable growth basket: Visa Inc. (V), MasterCard Inc. (MA), Paychex Inc. (PAYX), HCA Healthcare Inc. (HCA), Quest Diagnostics Inc. (DGX), ONEOK Inc. (OKE), and IDEXX Laboratories Inc. (IDXX). These stocks are drawn from the information technology, health care, and energy sectors.
- Corporate earnings are projected to fall year-over-year in 3Q 2019.
- Headwinds for profits persist into 2020, and perhaps beyond.
- Goldman Sachs recommends stocks with longterm stable profit growth.
- These stocks have outperformed in challenging macro environments.
Significance for Investors
While aggregate EPS for the S&P 500 are projected to drop YOY in 3Q 2019, Goldman notes that the median S&P 500 company nonetheless is expected to post a 3% increase. However, they see significant downside risks to profit estimates for 2020, mainly because they are less optimistic than the consensus about pricing power, or the ability of companies to pass cost increases along to customers through higher prices.
Over the past 10 years, payments processor Mastercard has shown slightly more variability in EBITDA growth than the median stock in the basket, but much less than the median Russell 1000 stock. With respect to EPS forecasts for the next fiscal year, the consensus is much tighter regarding Mastercard than it is for the median stock in either the basket or the Russell 1000.
In its 2Q 2019 earnings report released in late July, Mastercard beat the consensus EPS estimate by 3.3%, and delivered revenue in line with projections. Subsequently, Goldman placed Mastercard on its Conviction Buy List, “an exclusive list of the bank’s best ideas” Barron’s reports.
For 2019 to 2021, Mastercard management is projecting CAGRs in the low teens for net revenue and in the high teens for EPS. Mastercard is poised benefit from a rising tide of electronic payments, as a well as opportunities in Europe and the business-to-business market, despite economic uncertainties, analyst Jim Schneider of Goldman has written to clients, per Barron’s.
Competing payments processor Visa has had less variable EBITDA growth than the median stock in the basket, and considerably tighter consensus on future EPS growth. Like Mastercard, Visa has enjoyed a brisk tailwind from the rapidly rising popularity of digital payments, as well as increased credit card usage, partly due to the continued expansion of e-commerce, observes analyst Bryan Keene of Deutsche Bank, according to another report in Barron’s.
Keene believes that the market has yet to recognize the full potential for card companies in person-to-person payments, in cross-border cash transfers, in helping small businesses process payrolls, in speedier contactless payments at retailers, in standardizing online checkout, and in making installment payments easier. As market leaders, Visa and Mastercard are especially well-positioned in all these areas.
While the stable growth stocks identified by Goldman historically have held up well in challenging macro environments, there is no guarantee that they will continue to do so in the future. Also, Goldman’s 10-year study period does not include the entire span of the 2007-2009 Great Recession. As a result, it may be an imperfect guide to how these stocks may perform in the early and middle stages of the next recession.