The decade-long bull market is set to continue through early 2020 on the back of a durable profit cycle and ongoing economic expansion, but will be tempered by rising political and policy uncertainty. While that uncertainty is likely to dissipate following the outcome of the presidential election, it will serve to keep the S&P 500 range-bound for most of the next year, according to Goldman Sachs’ recent 2020 U.S. Equity Outlook.
In that context, investors will want to focus on growth at a reasonable price, or GARP. Ten stocks that fit that profile include Alphabet Inc. (GOOGL), MGM Resorts International (MGM), Lowe’s Companies Inc. (LOW), American Express Co. (AMX), Travelers Companies Inc. (TRV), Deere & Co. (DE), Raytheon Co. (RTN), Sempra Energy (SRE), CBRE Group Inc. (CBRE), and Varian Medical Systems Inc. (VAR).
Goldman expects the S&P 500 to rise to 3250 in the early part of 2020, implying a 3.5% upside from Tuesday’s close. For investors looking how to play that modest rise, Goldman screened for stocks within the Russell 1000 index that satisfy a variety of growth and valuation metrics. Specifically, the GARP stock screener returned 47 different stocks whose growth profiles are above average and whose valuations are middle of the pack, neither extremely elevated nor extremely discounted.
Growth was the main criterion by which Goldman’s GARP filter was constructed, reflecting the bank’s outlook that the U.S. economy remains supportive of growth stocks in the medium term. Stocks that ranked in the top 20% of their sector’s growth metric made the list. The growth metric was based on averages of past and predicted future sales and EPS growth, and on long-term expected growth.
But because past data shows that growth stocks with extremely elevated valuations rarely grow enough to justify those valuations, the GARP screen excludes stocks ranking among the top 20% of their sector’s valuation metric.