20 stocks to buy as saving, third-quarter earnings weaken: Goldman Sachs

  • Despite a strong third quarter GDP report, economic indicators show that a US recession is likely.
  • Third-quarter earnings were “disappointing,” wrote Goldman Sachs’ David Kostin.
  • Here are 20 stocks that are aggressively buying back stock and returning shareholder value.

After swinging up and down to report nothing in the first two weeks of October, the S&P 500 mounted an impressive rally in the second half of the month.

But it would be an overstatement to say that these gains were driven by strong market fundamentals. The US economy still seems to be heading for a recessioneven though Q3 GDP beats expectationsand Q3 pivotal results reports range from mediocre to “disappointing,” in the words of Goldman Sachs’ head of US equity strategy, David Kostin.

U.S. stocks rose during the earnings season, despite consensus third-quarter earnings-per-share growth of 2% year-over-year instead of 3%. The hope is that investors will be drawn to equities in the seasonal fourth quarter as the Federal Reserve completes its fight against inflationwrote Kostin in a note at the end of October.

And individual investors may not be the only ones ready to buy stocks again. With more than half of the third quarter earnings season now in the rearview mirror, companies will increasingly be able to buy back their own shares, which are a lot less expensive in all areas than they were in January.

“Corporations will likely continue to be the largest source of net equity demand in 2022 and 2023,” Kostin wrote in the note.

Assuming that the company making a share buyback is financially sound, buybacks are a positive sign for investors as they indicate that management is confident in the direction of the company and believes the stock is undervalued. Buybacks increase returns for current shareholders because a reduction in the number of shares outstanding increases the value of each remaining share.

While all companies are still able to make regular stock buybacks before sharing their quarterly results with Wall Street, they must wait until their buyback blackout period is over before making discretionary buybacks.

As more than half of S&P 500 companies have completed their earnings announcements and blackout periods begin to end, last week there were signs of a resurgence in buyout activity. shares, with companies repurchasing shares at double the average daily trading volume in 2021, Kostin wrote.

But while stock buyback volume increased this quarter, the amount of money spent to buy back stock declined over the year, Kostin noted. Gross redemptions were up 51% year-on-year across the S&P 500 in the first quarter and 7% year-on-year in the second quarter.

But for the third quarter, redemption executions were down about 19% year-over-year, largely due to lower redemptions among banks, the note said, suggesting that many companies are unwilling or unable to afford buyouts.

GS takeovers

Repurchase growth is down significantly year-over-year and quarter-over-quarter.

Goldman Sachs

Instead, companies are prioritizing research and development and dividends, which are expected to rise year-over-year by 10% and 5%, respectively, according to Goldman Sachs. It is therefore quite difficult to find companies that are fully committed to buying back shares.

20 stocks to buy for strong buybacks

Goldman Sachs has sought to find stocks that have net repurchase returns of 5% or more – meaning the company has repurchased at least 5% of its outstanding shares relative to market capitalization during the year elapsed – and was also able to increase its redemption rate during this time.

Below is a list of 20 companies that have increased buybacks by at least 5% in the last 12 months, along with the ticker, sector, forward price-to-earnings (P/E) ratio, redemption growth rate and net redemption yield for each. . Each company currently has an investment-grade credit rating, Kostin noted.

Note that the buyback data is from the second quarter and not all listed stocks have significant buyback growth. Stocks that experienced negative year-over-year redemption growth in the third quarter or are expected to see redemptions fall more than 50% next year were excluded from the analysis.