Goldman Sachs says stock picking is back and this is how to play it

Published Thu, Feb 16 20175:26 PM ESTUpdated Fri, Feb 17 201710:12 AM EST

The rise in macroeconomic uncertainty under President Donald Trump has created a unique opportunity for active investors to beat the market by finding stocks that trade to their own tune, according to a new report from Goldman Sachs. The investment firm says that after years of inflows into passively managed funds, the current investment environment seems conducive for "skillful stock pickers" to generate above-average returns. "We expect elevated economic policy uncertainty under the Trump administration will create 'winners' and 'losers' and stock performance increasingly will be driven by idiosyncratic factors, such as sensitivity to wage inflation, margin pressures, and uses of cash," Goldman's U.S. equity strategist, David Kostin, wrote in a note to clients Thursday. The strategist says the surprise election of Trump and the sweeping policy changes that will likely come with it has become a catalyst for stocks to stop trading so in line with each other. "The election has acted as a 'macro shock' and investor questions have become increasingly focused on industry and stock implications of new policies, such as the repeal of the Affordable Care Act or the potential implementation of a border-adjusted tax," he said. In the months ahead, Goldman Sachs predicts return dispersion will likely widen, generating investment opportunities for active managers. "We expect uncertainty to remain elevated throughout much of 2017, as President Trump's key policy initiatives become crystallized and the impacts of the new administration are fully processed by the market," Kostin wrote. As a result, the investment bank told clients to focus on sectors and stocks that trade on their own merit and are less influenced by the macro environment. "While we expect policy risks will continue to increase return dispersion in some sectors, consumer discretionary and information technology have the best combination of 'micro-driven' returns and high expected firm-specific risk," Kostin said. "Micro-driven returns" refers to the portion of a stock's move that's related to company-specific factors, while "firm-specific risk" relates to a stock's volatility from micro factors, with both metrics categorized as dispersion scores. "By construction, stocks with high dispersion scores have price movements driven more by company-specific factors than the median S & P 500 company, rewarding strong bottom-up stock-pickers. In contrast, stocks with low dispersion scores are more likely to track the market and/or their sectors," Kostin wrote. The list below highlights 10 companies with buy ratings from Goldman Sachs, high dispersion scores and substantial upside potential based on the 12-month price target from the firm's analysts.

President Donald Trump smiles during a news conference to announce Alexander Acosta as U.S. labor secretary nominee in the East Room of the White House in Washington, D.C.

Andrew Harrer | Bloomberg | Getty Images

The investment firm says that after years of inflows into passively managed funds, the current investment environment seems conducive for "skillful stock pickers" to generate above-average returns.

"We expect elevated economic policy uncertainty under the Trump administration will create 'winners' and 'losers' and stock performance increasingly will be driven by idiosyncratic factors, such as sensitivity to wage inflation, margin pressures, and uses of cash," Goldman's U.S. equity strategist, David Kostin, wrote in a note to clients Thursday.

The strategist says the surprise election of Trump and the sweeping policy changes that will likely come with it has become a catalyst for stocks to stop trading so in line with each other.