Investors should buy cyclical stocks and companies with high return on equity such as Oracle Corp. and Visa Inc. as the U.S. economy expands and stocks rally next year, according to Goldman Sachs Group Inc.
Economic growth, low inflation and interest rates near zero create a “superb environment” for stocks, Goldman investment strategist David Kostin wrote in a note dated Dec. 3. Cyclical industries such financial services, technology and energy will gain from the strong economic outlook and an 18 percent jump in the Standard & Poor’s 500 Index in 2011, the strategist said.
“Fund managers should own stocks leveraged to the accelerating U.S. economy,” Kostin wrote. “The stock market will re-rate growth when it becomes convinced the expansion is durable. Fund managers should be there first.”
Stocks that are leveraged so that they will benefit more than other equities from higher economic growth and a rise in the stock market -- so-called dual-beta stocks -- will jump, said Kostin, who also recommended Juniper Networks Inc., the second-largest networking-equipment provider after Cisco Systems Inc.; Broadcom Corp.; Qualcomm Inc.; Nasdaq OMX Inc., Baxter International Inc., Eaton Corp. and Hasbro Inc., the world’s second-largest toymaker.
Kostin said last week that he estimates the S&P 500 will end next year at 1,450, up 18 percent from the close on Dec. 3. The strategist forecast combined earnings per share for S&P 500 companies of $84 in 2010, $94 next year and $104 in 2012 in a report dated Dec. 1.
Goldman Sachs forecasts U.S. economic growth of 2.7 percent in 2011 and 3.6 percent in 2012. The global economy will grow 4.6 percent next year and 4.8 percent in 2012, according to the New York-based bank.