US-China trade tensions are playing havoc with the market right now. “Our year-end S&P 500 price target of 3100 represents a 9 percent return from the current level,” wrote Goldman Sachs' chief US equity strategist David Kostin recently. “However, US-China trade represents a significant source of uncertainty to our projection; a downside scenario could see the S&P 500 end 2019 at roughly 2620, or 8 percent below the current level.”
Luckily the firm has revealed a number of investing strategies it’s recommending for these turbulent times. Here we take a closer look at three of these strategies- as well as some of the most compelling corresponding stock picks. Indeed, all five stocks covered below tick both boxes: 1) they meet the Goldman Sachs investing criteria, and 2) they show significant Street support with a ‘Strong Buy’ Street consensus. That’s based on the last three months of ratings from the Street. Let’s take a closer look at how this plays out now:
Microsoft Corp (MSFT)
First, Goldman Sachs instructs investors to prioritize service-providing stocks over good-producing companies. “Services stocks have less exposure to trade conflict given they have lower foreign input costs that might be subject to tariffs and lower non-US sales than Goods firms,” explains Kostin.
He continues “Stronger services inflation should also benefit those firms relative to Goods firms. However, the relative valuation of Services vs. Goods is slightly elevated vs. history.”
A prime example of a ‘Strong Buy’ rated services stock is, of course, Microsoft. The world’s largest software company has scored 22 recent buy ratings from analysts vs just 1 hold rating and 1 sell rating. Their average price target works out at $154 (15% upside potential).
Credit Suisse analyst Brad Zelnick is very positive on MSFT. After the company reported stellar Q2 earnings, revealing strong cloud momentum, the analyst reiterated his buy rating and $155 price target. He wrote: “We maintain a bullish stance on MSFT as one of our top cloud ideas to own in 2019 based on a multiyear transformation of the model driven by commercial cloud revenue that could reach $100B in CY23 from a $44B run-rate today.”
Amazon.com, Inc. (AMZN)
Another large services stocks to bear in mind is Amazon. The company has scored no less than 30 back-to-back buy ratings in the last three months. What’s more analysts believe the stock can soar by 30% in the coming months. That would take the current share price from $1,765 to $2,286.
Most recently, Jefferies analyst Brent Thill released a very bullish report on Amazon’s outlook. In particular he has high hopes for cloud services platform, Amazon Web Services (AWS). According to Gartner forecasts, the cloud-computing market will more than double to $315 billion in 2023 from $135 billion last year.
“AWS remains the dominant Cloud player, set to capture the majority of forward industry growth as the de facto infrastructure provider,” he wrote. “We believe AWS would be worth [$300 billion to $400 billion] as a standalone company.”
As a result, the analyst reiterated his AMZN buy rating with a price target of $2,300 (31% upside potential). Note that Thill is one of the Top 10 analysts ranked by TipRanks (out of over 5,200), adding weight to the call.
Dollar General Corp (DG)
With trade war tensions rising, Goldman Sachs is also recommending clients focus on stocks with mainly domestic (i.e. US) sales. “What we are focusing on with our clients now... are companies that are more domestically facing in terms of the source of their revenue,” the firm’s David Kostin recently revealed on CNBC.
To this end, the firm put together a domestic sales basket of 50 S&P 500 stocks with the highest domestic revenue exposure. That includes US variety stores chain, Dollar General. Like a number of US-based retail stores, Dollar General boasts 100% domestic sales. It also shows a ‘Strong Buy’ Street consensus. Out of 14 analysts covering the stock, 13 rate DG a ‘buy’ right now. That’s with an average price target of $146.
A resounding vote of confidence comes from top KeyBanc analyst Bradley Thomas. “Dollar and discount stores remain investments where we believe investors can find growth and defensiveness” he tells investors. “DG and DLTR remain two of our favorite large-cap ideas” the analyst adds.
AT&T Inc (T)
A third potential strategy recommended by Goldman Sachs is to up your dividend exposure. “With the 10-year Treasury yield at just 1.5 percent and the Fed likely to cut two more times this year, investors should look for opportunities in dividend stocks” Kostin told investors.
A move towards high-paying dividend stocks provides an attractive alternative to lower bond yields, as well as a cushion against lower share price gains. And when it comes to dividends, AT&T is at the top of its game.
After all, this popular Dividend Aristocrat offers investors a lucrative dividend of 5.88%, easily beating the tech sector average of just 1.01%. This translates into an annualized payout of $2.04 (paid quarterly). And don’t forget the company’s record 34 years of consecutive dividend growth.
With 6 out of 8 polled analysts bullish on the stock, T scores a ‘Strong Buy’ consensus from the Street. Morgan Stanley’s Simon Flannery recently met with senior management at AT&T and came away encouraged about progress across several business units. He believes the company is extending its wireless leadership with FirstNet and 5G and notes that shares still trade at historically low valuation levels.
Valero Energy Corp (VLO)
Another stock singled out for its generous dividend offering is Valero Energy. Valero is a leading manufacturer and marketer of transportation fuels and petrochemical products. For instance, it operates 15 petroleum refineries with a combined throughput capacity of approximately 3.1 million barrels per day.
And when it comes to dividends, VLO investors can expect to receive an annualized payout of $3.60 (paid quarterly). That’s with a dividend yield of 5% vs the sector average of 2.74%. So far VLO has stacked up 8 consecutive years of dividend growth. Plus the company also has a very strong program to return capital to shareholders, with $11+ billion returned in 2015–18.
Encouragingly, all seven analysts covering VLO have published bullish calls on the stock. Meanwhile the $98 average price target indicates sizable upside potential of 37%. “We like Valero Energy for its position at the bottom of the global refining cost curve and its significant leverage to the US Gulf Coast refining market” explains RBC Capital analyst Brad Heffern.
He reiterated his buy rating after VLO reported an earnings beat back in July. The analyst added: “Valero also has great optionality in its refinery portfolio given its high complexity. This allows VLO to easily pick and choose the crudes that it runs and to arbitrage the global crude market.”