Goldman Sachs likes these stocks that are growing profitably

Published Thu, Apr 25 20247:00 AM EDTUpdated Thu, Apr 25 20249:20 AM EDT

As the equity market's profitability nears its all-time highs, Goldman Sachs recently shared some stocks that could see big growth over the next 12 months. Expanding margins and asset turnover boosted the S & P 500's trailing four-quarter return on equity to 20.8% last year, pushing the measure into its 98th percentile versus history. The 85-basis-point increase in 2023 comes after a 214-basis-point contraction in 2022, "reflecting a stabilization in profitability," wrote Goldman Sachs chief U.S. equity strategist David Kostin. Return on equity, or ROE, is a common gauge of a company's profitability, and is measured by dividing a company's annual return — or net income — by its shareholders' equity. A stock with a higher ROE value is considered more efficient at income generation. Kostin said the gains in profits were not exclusive to one sector, with the majority of industries seeing benefits from expanding margins. The strategist noted that eight of the 11 sectors have ROEs that rank above their historical medians. The consumer discretionary sector saw the largest increase in ROE to a new high of 35%, propelled by a "broad-based rebound in profitability within the sector." On the other hand, energy fared the worst with a decline of 1,231 basis points. One basis point equals 0.01%. In 2024, Kostin expects margin expansion will continue to support ROE growth. "We expect strong economic growth of 2.9% in 2024 (annual average) and higher profits for the Info Tech and Comm," he wrote. "Furthermore, our rates strategists' expectation for lower US yields across the curve and the relationship between rates and borrow costs suggest pressure from rising borrow costs should subside." In the same report, Goldman Sachs shared its rebalanced ROE growth basket of stocks, which contains 50 names selected for their expected profit growth over the next 12 months. The median member of this group is expected to post ROE growth of 14% versus the S & P 500's median of 1%. One name that made the cut was Estée Lauder . Analyst consensus estimates suggest the cosmetics giant could grow its ROE by 43%, versus the consumer staples sector median of a 2% decline. Shares of Estée Lauder are trading about flat for the year. Earlier this month, the stock popped after Deutsche Bank added a short-term buy rating for the name, saying the stock is well-positioned ahead of its next earnings release on May 1. Similarly, GE Aerospace could see an ROE growth of 48% versus the industrials sector's median of a 2% slide. Shares of the aircraft supplier, which separated from General Electric's power business earlier this month, popped 8% on Monday after reporting a first-quarter earnings and revenue beat. The stock is now up about a whopping 25% year to date. Goldman highlighted solar technology company First Solar as another potential winner, saying it could grow its ROE by 34% in the next year. The information technology sector is expected to see a median ROE decline of 4%. Rising growth fears, solar compensation cutbacks and rising interest rates sank solar stocks last year, but they have since made a comeback. Shares of First Solar are up nearly 3% on the year. Earlier this month, Wells Fargo upgraded the stock to an overweight rating , citing relative stability. Janney initiated the stock at a buy , noting it could benefit from a "tougher on China" trade policy, while Evercore ISI also upgraded the name to outperform from in line due to increased tariffs. Communications stock T-Mobile is poised to grow its profitability by 32% in the next 12 months, higher than its sector median of a ROE decline of 2%. Shares are currently trading 2.4% higher for the year. Kostin also highlighted Blackstone , which is poised to grow its profitability by 21% in the near term. Consensus estimates for the financials sector reveal that most analysts expect ROE growth to remain flat during the same period. Shares of Blackstone slipped last week, after the investment manager lowered its dividend payment to 83 cents per share from 94 cents. The stock is now down more than 5% on the year.