There’s a lot going on in the markets, and the only certainty is uncertainty. To cut through the fog, investment bank Goldman Sachs has been releasing reports on the stocks that it believes will bring returns to investors despite a cloudy economic horizon.
David Kostin, Chief U.S. Equity Strategist at Goldman, believes that the Coronavirus outbreak won't have a lasting impact on the markets, and said in a note, “Investors who believe the economic consequences of the coronavirus will be limited should increase exposure to cyclicals and value stocks.”
With this in mind, we pulled up three of Goldman Sachs’ recent stock picks which the renowned investment bank thinks can soar in the coming months. Using TipRanks’ Stock Comparison tool, we were able to read the fine print on what 2020 has in store for the three tickers. Let’s take a closer look.
Simply Good Foods Company (SMPL)
We’ll start with a mid-cap food and snack business, Simply Good Foods. In business since 2017, when it was formed through a corporate merger, Simply Good Foods develops and markets nutritional snacks and foods. The company operates in Colorado and Connecticut, where it offers nutrition bars, ready-to-drink shakes, and confectionery products under the Atkins and Simply Protein brand names.
Early in January, SMPL released its fiscal Q1 earnings results, and the numbers showed that the nutritious snack business is solid in the Rockies’ Front Range. Revenues were way up year-over-year, coming in at $152.15 million, for a 26% annual gain. EPS was also strong. At 22 cents, it was up 22% year-over-year, and 4.7% above the forecast. It was the third time in a year that SMPL beat the EPS forecast.
In the second half of 2019, SMPL completed its acquisition of competitor Quest Nutrition. The move cost SMPL $1 billion, which the company paid through a combination of cash and credit. It’s important to note that SMPL racked up its earnings and revenue annual gains while adding $460 million to its outstanding loan balance. SMPL management has plans in place to pay down a large portion of the debt during fiscal 2020.
Goldman analyst Jason English is bullish on SMPL, adding the stock to his firm’s Conviction List. The analyst wrote, “We add Buy-rated SMPL to the Americas Conviction List given its portfolio of advantaged brands, especially in the bars segment, and reiterate our Buy rating on BRBR given the appeal of its Premier Protein brand. We see compelling fundamental rooted upside for both, as well as M&A optionality."
English backs his Buy rating with a $34 price target, suggesting an upside potential here of 41% in the coming year.
SMPL has the luxury of a unanimous Strong Buy consensus rating. The average price target, $33, gives the stock an impressive 37% upside from the current share price of $24.06.
WW International, Inc. (WW)
Next up is Weight Watchers, the well-known diet program. What is less well-known about the company is that it is a billion-dollar empire, founded not just on weight loss programs and products, but also on fitness programs and healthy habits assistance. The company’s programs are designed to steer customers towards better overall health and wellness, not just weight loss – and the company brings in over $1.5 billion in annual revenues, based on customer subscriptions.
In September 2018, Weight Watchers rebranded itself, using the initials WW as the name, to emphasize the shift to health and wellness. The move was well received in the industry, and WW has shown steady earnings in 2H19. In Q3, the company brought in $348.6 million in revenue, and showed EPS of 68 cents, beating the forecast by 1.5%.
Looking ahead to Q4, the forecast predicts a sequential drop but continued year-over-year gains. EPS is expected at 37 cents. To put the quarter in context, the company has a history of stronger Q1 and Q2 performances, followed by lower second-half numbers. In other good news for the company, in December WW announced that it will be extending its partnership with Oprah Winfrey into the year 2025.
Jason English, quoted above on SMPL, also reviews WW for Goldman Sachs. Looking at the stock’s prospects going forward, he wrote, “WW’s fundamental (and stock price) performance has historically run in cycles. Positive inﬂections in these cycles have typically been accompanied by multifaceted layers of new news to engage the consumer… On the back of our increased subscriber growth rate assumptions, our FY20 EPS expectations rise 47% and now rest 20% ahead of FactSet consensus… we also see potential for WW’s valuation to re-rate higher…”
Seeing a discount in the stock at current prices, and strong positive prospects with the continuance of the Oprah partnership, English upgraded his stance on WW from Neutral to Buy. Supporting this, he gives the stock a $48 price target, implying a strong upside of 28%.
WW shares get an even split from Wall Street, with 3 Buys and 3 Holds averaging out to a Moderate Buy consensus rating. Shares are selling for $37.34, and the average price target, $43.40, indicates room for 17% growth to the upside in the next 12 months.
Domino’s Pizza, Inc. (DPZ)
The last stock on our list might seem incongruous, after health snacks and Weight Watchers, but Dominos Pizza has long been a staple of the stock markets. And, for the last two years, the company has been the world’s largest pizza delivery chain, by sales volume. The Ann Arbor, Michigan based company brings in approximately $3.5 billion in annual revenue – which is a whole lot of pizza served.
Domino’s has been feeling pressure in the past year from the advent of third-party delivery companies (think GrubHub or Uber), which have been cutting into the fast-food industry’s margins. Domino’s image is built on fast delivery – a promise it has held to since the 1990s. The company has pushed back, with PR initiatives like fixing potholes, and with practical initiatives in robotic delivery systems. A program for the latter is under development in Houston, Texas.
The pizza company is predicting mixed results going forward. In the Q3 report, DPZ beat expectations, with EPS at $2.05, while revenues, at $820.8 million, were almost exactly on the forecast. Looking ahead, the company lowered its forward guidance, citing increased delivery competition. In its note on earnings, management said it expects sales growth of 7% to 10% over three years, as opposed to the previous figure of 8% to 12%. At the same time, the company has a history of overcoming obstacles (it successfully turned around its reputation for poor quality in the early 2010s) and its last quarterly report showed that cash on hand had more than doubled while long-term debt declined slightly. DPZ will report Q4 results next week, and analysts expect EPS to come in at $2.94, for substantial gains both sequentially and year-over-year.
Writing up DPZ for Goldman, Katherine Fogertey noted the upcoming quarterly release as reason for optimism. She writes, “[W]e expect the company’s overall commentary to support their long-term unit and system sales growth targets. Namely, we are encouraged by what we view as industry leading franchisee returns and expect fortressing can help delivery growth in carryout and further improve DPZ’s competitive advantage versus third party aggregators.”
In line with her upbeat view of DPZ’s prospects, she upgraded her outlook and gave the stock a Buy rating. Her price target, $320, implies an upside potential of 16% over the coming year.
Domino’s Pizza shares are currently selling for $274.85, and have an average price target of $309.92. This gives the stock an upside potential of 13% in the coming year. Wall Street’s analyst corps is somewhat divided on this one, but leans toward buying – with 10 Buy ratings, 4 Holds, and 1 Sell, DPZ gets a Moderate Buy from the analyst consensus.