Is the market’s recent run of record high levels another bubble? And is the recent retreat the beginning of a burst, or just a correction? Will investors take heart from the strong August jobs report? And what about the election – how will the nation’s unstable political scene impact the financial markets? These are just a few of the questions that investors must answer as September heats up.
Two strategists from investment giant Goldman Sachs have weighed in on market prospects in recent days, and have published diverging opinions. For the bulls, Jan Hatzius sees the employment numbers as the key data point, saying that even if growth has slowed from its breakneck pace in the immediate aftermath of the economic reopenings, it should remain strong in the coming months.
Equity strategist Christian Mueller-Glissman, however, sees the current high valuations as a ‘speed bump,’ and predicts that there will be a correction by autumn. “This is what always happens after a bear market. You get an initial very sharp recovery, and then you get a period where the market actually sees what type of earnings growth you're really getting,” Mueller-Glissman said. He pointed to increasing volatility as an indicator that stocks have reached an upper limit – but added that the macroeconomic data is ‘incredibly strong,’ and that, combined with governmental policy support, “I would be surprised if we go back into a bear market type situation.”
So, we have an uncertain situation. Markets have been rising, but the last few sessions point toward a – possibly – developing correction. Volatility is high, making investors nervous – but government economic regulators are clearly intent on supporting high valuations. It’s a situation tailor-made for caution.
Goldman Sachs’ stock analysts understand this, and the generally risk-averse stance of the firm right now implies that the analysts’ approach is more selective.
Taking all of this into consideration, we used TipRanks’ database to take a closer look at three stocks flagged by Goldman Sachs analysts for their solid growth prospects. We’re talking about over 40% upside potential here.
Rackspace Technology (RXT)
Texas-based Rackspace has a history of providing software and cloud computing solutions for the business world, with cloud-based technologies viable across applications. The company’s services include data management and security, at any scale, designed to optimize returns. Rackspace operates around the world, with international offices in, among other places, the UK, Germany, India, Singapore, Hong Kong, and Australia. Rackspace started trading publicly back in August, and the stock is up 16% since then.
Shares slipped slightly after the Q2 results. The company showed a 9% year-over-year revenue gain, and EPS of 21 cents. Investors saw the negative, however, that earnings were down from the year before. Company guidance predicts full-year EPS between 75 and 81 cents, and revenue growth between 9% and 10% year-over-year.
Goldman Sachs analyst Heather Bellini, rated 5 stars at TipRanks, rates RXT shares a Buy with a price target of $38, implying an impressive 99% upside potential for the stock this year.
Backing her bullish stance, Bellini writes, “We believe in a world of cloud complexity and cost control Rackspace is well positioned to aid the transition from self-managed IT services to an end-to-end multicloud service management platform. As customers continue to move workloads to the cloud, we believe they will increasingly depend on more than one cloud solution at a given time to enhance performance, increase resiliency and security.”
The Street agrees that RXT shares have a bright future, as evidenced by the unanimous Strong Buy analyst consensus on the stock. This is based on 9 recent positive reviews. Shares are priced at $19.27, and the average price target of $27.44 suggests a 43.5% upside potential for the year ahead.
Plains All American Pipeline (PAA)
Next on our list, Plains All American, is another Texas-based company, this time in the energy industry. The Texas oil patch has seen a renaissance in the last decade, and pushed US to become the world’s leading producer. PAA, a major midstream provider, operates pipelines across North America, with pipelines and storage facilities all along the Rockies, from northern Alberta into Colorado, and down to Oklahoma and the Gulf Coast. Company assets also include crude oil and natural gas liquid storage in southern California, and natural gas facilities across the upper Midwest. PAA also has marine terminals at Yorktown, Virginia.
Lower demand in 1H20 impacted PAA’s revenues, with the hit coming in the recent Q2 report. The company showed a 61% drop in revenues, to $3.23 billion for the quarter, and EPS of 25 cents, down from 55 cents per share in the previous quarter. On two positive notes, management updated the full-year net-earnings guidance, boosting it by 3%, and the July dividend was paid out as scheduled, at 18 cents per common share. While the dividend was cut by half earlier this year, as a cash-saving measure against the COVID-19 pandemic, the company has stated no plans to cut it further. The dividend currently yields 10%.
Taking the bullish stance on PAA is Goldman analyst Michael Lapides. His $11 price target on the stock indicates confidence in a 58% one-year upside.
In his comments, Lapides explains his upbeat outlook: “We continue to expect PAA’s Permian footprint of gathering, intra-basin, and long-haul pipelines to benefit from the basin’s lower breakeven production costs relative to most other US shale plays, driving a quicker recovery in production as commodity prices increase and thus throughput on PAA’s system. Furthermore, we see upside to our S&L EBITDA estimates - with our 2020 forecast at $263m and 2021 at $190m for this segment - as PAA could benefit from the oil-price contango, capturing incremental arbitrage opportunities from the partnership’s owned storage positions in the Permian, Gulf Coast and the small uncontracted portion of its sizable Cushing storage assets.”
Overall, Plains All American gets a Moderate Buy consensus rating, based on 10 reviews including 5 Buys, 4 Holds, and 1 Sell. The average price target, at $11.33, suggests room for 62% growth from the current share price of $6.98.
Oak Street Health (OSH)
The last stock on today’s list, Oak Street Health, is a medical care provider, operating a network of primary care physician clinics under the auspices of Medicare. The network focuses on adults’ general medical care. Oak Street Health’s clinics can be found in Pennsylvania, Ohio, Indiana, Illinois, and Michigan, as well as Rhode Island, North Carolina, Tennessee, and Texas. The company was founded in 2012, and held its IPO this past August.
In the time since the IPO, the health network’s shares have gained 15%, bringing the company’s market cap up to $11 billion.
Oak Street is performing well financially, and is expanding, too. The company announced on September 1 a collaboration with Walmart – Oak Street will open clinics in three Dallas-Fort Worth area Walmart supercenters by year’s end.
Goldman Sachs analyst Robert Jones notes the Walmart deal, and says, “The company sees this as a pilot to assess the impacts of embedding its centers within a larger retailer’s footprint, which could also improve the economics of serving non-MA patients. Longer-term, OSH could also seek to capitate these non-Medicare patients with Managed Medicaid or Commercial MCOs, which would represent an entirely new market for the company. Overall, we think this collaboration could be an interesting upside area to an already attractive story.”
Jones backs these comments with a $66 price target, suggesting a robust 43% upside potential. Unsurprisingly, he rates the stock a Buy.
All in all, Oak Street Health has 7 recent reviews, breaking down to 6 Buys and 1 Hold, giving the stock a Strong Buy rating from the analyst consensus. The shares are trading at $46.28 and have an average price target of $55.50, indicating room for ~20% growth in the next 12 months.