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Goldman lays out its top stocks to watch for the great reopening trade

March 30, 2021, 9:26 AM UTC

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Good morning, Bull Sheeters.

Tech futures again are under pressure after yesterday’s sell-off. But there’s good news in Big Finance, Monday’s other big loser. The fallout of the great Archegos Capital Management implosion seems to have stabilized. While losses could grow for the banks caught on the wrong side of those soured trades, there’s hope the worst of it is behind us.

In today’s essay, we talk about ROE, an under-appreciated metric you should apply against your portfolio, particularly as the great rotational trade accelerates into overdrive. As such, I list 19 stocks to watch that Goldman Sachs says are poised for big bottom-line growth this year.

But first, let’s see what else is moving markets.

Markets update

Asia

  • The major Asia indexes are mostly higher in afternoon trading, with the Hang Seng up 0.8%.
  • Even as China was pledging a big net-zero goal a year ago it was leading the developed world in the burning of coal, a new study reveals.
  • Where in the world is the Ever Given this morning? It’s upstream, no longer blocking traffic. But it could take a few more days before Suez Canal traffic returns to normal. Meanwhile, millions of us on Twitter will need a new hobby.

Europe

  • The European bourses were a touch higher with the Stoxx Europe 600 up 0.6% a half-hour into the trading session.
  • Help is on the way for COVID-slammed Europe. Johnson & Johnson announced yesterday it would begin delivery of its single-dose jab to the EU on April 19.
  • How serious is Volkswagen about its EV pledge? The carmaker, known for the dieselgate emissions scandal, plans to change its name to Voltswagen in the United States. ⚡⚡⚡

U.S.

  • U.S. futures are mixed, with tech continuing to underperform. That’s after the DJIA hit a fresh record on Monday.
  • The collapse of Archegos Capital Management has turned into the Wall Street equivalent of a multi-billion-dollar game of hot potato. The banks that fared okay—Goldman Sachs, Deutsche Bank and Morgan Stanley—were able to quickly sell off big block trades tied to Archegos. Those that were late in doing so—Nomura and Credit Suisse, namely—paid the price.
  • Shares in Qualcomm were flat in the pre-market despite news that the FTC is dropping its four-year antitrust case against the chips giant.

Elsewhere

  • Gold is getting roughed up again, trading around $1,700/ounce.
  • The dollar is gaining again and equities are under pressure.
  • Crude is flat with Brent trading below $65/barrel.
  • Bitcoin is trading above $58,000.

***

Hey Nineteen

If you go by share price, the S&P 500 had a good year in 2020. No news there. But by another important measure—return on equity (ROE)—last year was pretty lousy.

ROE is a measure of your portfolio’s performance as calculated by net income divided by shareholders’ equity. What you need to know about this calculation is that ROE is a reliable indicator of a company’s potential to consistently turn a profit. An ROE of anything above 14% is considered above average.

In 2019, the ROE of the benchmark S&P as a whole was 18.3%. That’s well above average. And last year? According to Goldman Sachs, it was a pretty unexceptional 14.6%, “the lowest level since 2016.” The culprit was plunging margins. You can see how operating profits (or the lack of them) factored into the weaker ROE picture, as the Goldman chart below shows:

Goldman believes profitability will rebound this year, and, in turn, ROE will climb. High-ROE firms are the quintessential value stocks. And, if you’ve been paying any attention to the markets this year, you know value stocks are a a very good place to put your money.

By ROE standards, certain sectors stand to gain more than others this year. For example, construction is a good bet, particularly with a massive infrastructure spending package looming. Financials, too, are set up for a promising run as the reopening trade gathers steam.

Goldman has updated this week the collection of companies that make up its “ROE Growth basket.” That is, the stocks that are expected to see the biggest surge in ROE this year. There are 50 in total. I will list here the top 19 (the 19 that are expected to see an ROE growth rate this year above 30%, a stellar number).

I break them out by S&P sector:

Communications Services:

News Corp. (Ticker: NWSA), with a 39% ROE growth forecasted for 2021.

Consumer Discretionary:

Chipotle Mexican Grill (CMG). 48% ROE growth forecast for 2021.

BorgWarner (BWA). 33% ROE growth.

eBay (EBAY). 32% ROE growth.

Energy

Schlumberger (SLB). 39% ROE growth.

Financials

American Express(AXP). 49% ROE growth.

American International Group (AIG). 47% ROE growth.

Huntington Bancshares (HBAN). 45% ROE growth.

Regions Financial. (RF). 42% growth.

Citizens Financial Group (CFG). 41% growth.

Chubb Limited (CB). 36% growth.

Materials

Nucor Corp. (NUE). 47% ROE growth.

Health Care

Align Technology (ALGN). 38%

Boston Scientific (BSX). 32%

Dentsply Sirona (XRAY). 32%

Industrials

Raytheon Technologies (RTX). 42%

Information Technology

IPG Photonics (IPGP). 42%

DXC Technology (DXC). 35%

Real Estate

Digital Realty Trust (DLR). 33%

***

Bernhard Warner
@BernhardWarner
Bernhard.Warner@Fortune.com

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The great reversal trade. Lockdown favorites—think Peloton, DoorDash and Zoom Video—are getting absolutely hammered this year. Meanwhile, value stocks are booming. The Wall Street Journal spells out, in charts, what a difference a year can make to your stock portfolio, and how to play it.

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Market candy

-55%

One of the big scalps taken out in the tumult of the Archegos saga is ViacomCBS. Shares in the media giant have plunged 55% since March 22, the same day it said it would sell new shares to finance its streaming business. Overall, the media giant's share price trajectory looks something like that of GameStop—that is, it's seen a meteoric rise and fall in 2021. But even with the dramatic sell-off in recent days, the company's share price is up nearly four-fold from where it was trading as the pandemic hit.

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