Markets

Goldman Sachs has a simple 'laggard' stocks strategy for early 2020 that tends to beat the market

Key Points
  • The strategy to pick up battered stocks in the beginning of a given year has a good track record of beating the market, according to Goldman.
  • Among the bottom third of the S&P 500 in terms of 2019 performance, Goldman recommended buying the laggards that its analysts have out-of-consensus buy ratings and above-consensus estimates.
  • Westlake Chemical, L Brands, Terex, Yelp, Cree and Under Armour are some of the "buy-rated laggards" of 2019 where the majority of the Street has neutral or sell ratings but Goldman analysts recommend buying.
Traders work on the floor at the New York Stock Exchange, October 25, 2019.
Brendan McDermid | Reuters

Buy 2019's laggards as they will likely be 2020's early leaders, Goldman Sachs said.

The strategy to pick up battered stocks in the beginning of a given year has a good track record of beating the market, according to Goldman. The prior year's bottom-third stocks have outperformed the S&P 500 in the first quarter for 11 times out of the past 17 years with an average 1.4% extra return on the benchmark, the bank said. In 2019, this laggard trade outperformed the S&P 500 by 3.7 percentage points, Goldman said.

Among the bottom third of the S&P 500 in terms of 2019 performance, the bank recommended buying the laggards that its analysts have out-of-consensus buy ratings and above-consensus estimates.

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Westlake Chemical, L Brands, Terex, Yelp, Cree and Under Armour are some of the "buy-rated laggards" of 2019 where the majority of the Street has neutral or sell ratings but Goldman analysts recommend buying.

Goldman also likes laggards where the bank's price targets are at least 5% above consensus in 2020. Under Armour, Etsy, Twilio, Westlake Chemical and GoDaddy are among the names on that list.

Under Armour is up only 5% on the year and Etsy has fallen 11% in 2019, both significantly lagging the S&P 500's 24% gain. Petrochemical manufacturing company Westlake Chemical and web hosting company GoDaddy both are up about 1% this year.

To be sure, this year's record-setting rally created a different setup for this strategy as even the laggards are up year to date. So Goldman is advising clients against blindly piling into all of them.

"2019 has seen the strongest YTD absolute performance for laggards in over 5 years," Alex Meintel, an analyst at Goldman, said in a note to clients Monday. "It underscores the importance of a selective approach to playing this year's group of laggards."

Stocks rebounded from a three-day slide on Wednesday and were on track for another up day on Thursday on renewed trade optimism. The S&P 500 is on pace for its best annual performance since 2013.

"While the relative performance of laggards is in line with history, absolute performance is actually positive so far this year (+1% and +6% average and median, respectively), something that has happened just two other times since 2002," said Meintel.

Energy and discretionary laggards are down the most this year, underperforming the market by 32% and 30%, respectively, the analyst said.