2019 has been a fantabulous year for stock investors, with the S&P 500 returning 24% year to date. But here's the bad news: all good things must come to an end, and the clock's ticking down to the end of 2019.
But here's the good news, too: 2020 might also be not too shabby a year for stocks. At least, not according to the stock pickers at investment bank Goldman Sachs.
In a market forecast report released last week, Goldman Sachs suggested that with growth trends stabilizing, there's every chance 2020 will be a "decent" year for "risky" assets such as stocks. Albeit, Goldman prefers to buy "quality" equities when possible, because earnings growth on average could be "subdued" this coming year.
So where do you find such stocks high on quality -- but ideally, stocks just "risky" enough that their valuations might still be depressed, leaving potential for upside in 2020? Utilizing the Stock Screener at TipRanks, we've sought out stocks rated highly by none other than Goldman Sachs itself, and have come up with three such. Let's get to know them, beginning with...
ProSight Global (PROS)
We begin our search today in Morristown, New Jersey, where over the last 10 years, ProSight Global has built itself a business as a specialty insurer offering commercial auto, general liability, workers' comp, and other lines of insurance.
Despite the company being around for a decade, ProSight may not be a name familiar to most investors, inasmuch as it only IPO'ed back in July of 2019. But with a trailing price-to-earnings ratio of less than 3, this might be a stock you'll want to get to know.
Last week, Goldman Sachs analyst Yaron Kinar upgraded ProSight Global from "neutral" to "buy," assigning the shares a $22 price target that implies about 25% upside in the shares. (To watch Kinar's track record, click here)
Why does Kinar share a bright view of ProSight? The analyst explains: "Specialty insurers tend to have higher expense ratios than standard carriers," a fact that may be acting to depress ProSight's stock price. But ProSight's expense ratio is improving while its "loss ratio remains stable," and premiums are growing, too -- all trends that could help the stock price to grow in the new year.
"While not cheap in absolute terms, PROS shares' 1.5x price to book multiple is below the ROE regression-implied valuation and peers , with PROS shares down by 11% since our initiation in August. We believe that this provides a more compelling risk-adjusted return and more attractive entry point," Kinar concluded.
Other analysts are even more optimistic. Indeed, the average price target on Wall Street is $23.50 -- implying nearly 34% upside! And over the last three months, no one on the Street has assigned ProSight shares anything less than a "buy" rating. In addition to Kinar's upgrade last week, ProSight won an endorsement from 5-star-rated (on TipRanks) analyst Mark Hughes of SunTrust Robinson just last month. (See ProSight stock analysis on TipRanks)
Magellan Midstream Partners (MMP)
Moving on to what is perhaps a more familiar name (or not), midstream (that means transportation, storage, and distribution) oil and gas company Magellan Midstream Partners is no stranger to income investors. Its 7% dividend yield easily trumps the 2% average dividend of other S&P 500 stocks, while its very reasonable 12.8 P/E ratio is barely half the 23 P/E of the S&P as a whole.
It's no surprise, then, that Goldman Sachs likes the stock. Last week, Goldman analyst Michael Lapides slapped a "buy" rating on the shares, initiating Magellan with a $69 target price that implied 22% upside -- versus 16% profit potential for the rest of the oil and gas industry as a whole. (To watch Lapides' track record, click here)
Hewing to Goldman's expressed preference for higher quality stocks in 2020, Lapides highlighted Magellan's "lower risk profile relative to most midstream stocks." Among other things, he likes the company's "exposure to refined products pipelines and terminals," which generated "roughly 60%" of the company's earnings before interest, taxes, depreciation, and amortization, as well as the company's "stronger balance sheet," about 33% less leveraged than other midstream players.
Despite these advantages, Lapides notes, Magellan stock "trades now slightly below its historical trend" both "on an absolute" basis, and also relative to its peers, suggesting there's room for upside as that valuation gap closes -- and the rest of Wall Street agrees.
Over the past month alone, "buy" ratings have outnumbered "sells" four-to-one on Magellan, and the average target price on Wall Street is just a smidge short of Goldman's targeted $69 price -- $68.83 on average, across all analysts surveyed by TipRanks. Assuming they're right about that, investors in Magellan today stand to rake in better than a 17% profit over the next year -- and a 7% dividend yield besides. (See Magellan Midstream stock analysis on TipRanks)
TIM Participacoes (TSU)
And now for something completely different... as we dive way south of the border to investigate Brazilian telecommunications giant (and Goldman pick) TIM Participacoes.
Despite carrying an $8 billion market capitalization, TIM is actually a very reasonably priced telco stock, costing less than 12 times earnings at last report. By way of comparison, a share of Verizon will set you back more than 15 times earnings, while AT&T stock is fetching closer to 17x earnings.
Goldman Sachs analyst Diego M. Aragao reiterated his buy rating on TIM in the wake of a Q3 earnings report, noting "TSU reported good numbers, beating our estimates from top to bottom."
As Aragao explained, though, TIM's earnings were somewhat depressed by a one-time "monetary correction on tax credit and labor, tax and civil contingencies of R$66mn." Meanwhile, revenues did resume rising, with average revenue per user of TIM's mobile services up a healthy 6% -- and fixed line revenues were up 7%.
Forecasting an even "brighter outlook ... for the Brazilian sector" in 2020, Aragao likes TIM's valuation of just 3.5 times estimated 2020 EBITDA, and sees the stock rising potentially 24% to his target price of $20 a share. (To watch Aragao's track record, click here)
The only other analyst to rate the stock in the last six months -- Mathieu Robilliard of Barclays -- is nearly as optimistic, rating TIM a "buy" with a $19 target price. So overall, the analysts, on average, think the stock could go even higher, perhaps as high as $21 -- 30% upside from today's prices. (See TIM Participacoes stock analysis on TipRanks)