As we head closer to the end of the year, for many investors it’s time to start thinking about what to add to their portfolios next year.
Goldman Sachs (NYSE: GS) is out with a strategy this week that it says has a good track record for beating the market: buying this year’s laggards.
According to Goldman, buying the prior-year’s bottom-third stocks has historically outperformed the S&P 500 in the first quarter of the next year 11 out of the past 17 years with an average 1.4% extra return on the benchmark index.
In 2019, this battered stocks trade has outperformed the S&P 500 by 3.7 percentage points, the firm said.
Heading into 2020, Goldman recommends buying those laggards that its analysts have out-of-consensus buy ratings on and above-consensus price targets.
Included on the “buy-rated laggards” list are Cree (NASDAQ: CREE), Etsy (NASDAQ: ETSY), GoDaddy (NYSE: GDDY), L Brands (NYSE: LB), Terex (NYSE: TEX), Twilio (NYSE: TWLO), Under Armour (NYSE: UAA), Westlake Chemical (NYSE: WLK), and Yelp (NYSE: YELP). These stocks have returned 2.05%, -13.66%, 3.09%, -29.61%, 2.54%, 9.23%, 6.28%, 2.18%, and -4.49%, respectively, so far in 2019.
Even the best performers in the group, Twilio and Under Armour, have delivered gains far below the S&P 500’s 24% year-to-date return.
Of these, Goldman analysts have buy ratings on Cree, L Brands, Terex, Under Armour, Westlake, and Yelp where other analysts have neutral or sell ratings, and the firm has price targets 5% higher than the Street’s consensus on Etsy, GoDaddy, Twilio, Under Armour, and Westlake.
However, while this “buy-rated laggards” strategy has historically performed well, Goldman cautions against investors just blindly buying the group.
“2019 has seen the strongest YTD absolute performance for laggards in over 5 years,” said Goldman analyst Alex Meintel in a note to clients. “It underscores the importance of a selective approach to playing this year’s group of laggards.”
“While the relative performance of laggards is in line with history, absolute performance is actually positive so far this year (+1% and +6% average and median, respectively), something that has happened just two other times since 2002,” Meintel added.