Goldman has a new method for picking stocks that's topping the market

Published Thu, Jan 2 20201:29 PM ESTUpdated Thu, Jan 2 20205:00 PM EST

Jesse Pound @/in/jesse-pound @jesserpound

Tracking changes to expected sales numbers is one of the best ways to pick stocks, according to new research from Goldman Sachs . Analysts at the bank set out to see if changes to revenue projections by analysts were a leading indicator of stock performance. The idea was to find out if this measurement, which the analysts referred to as the revisions factor, could be used in the same way as traditional factors such as momentum and value and provide an edge to investors. To test this, Goldman sorted stocks based on recent changes to consensus revenue projections in FactSet. Analysts then created a hypothetical portfolio that was long the top 20% of stocks in each coverage area and short on the bottom 20%. This was rebalanced on a weekly basis, going back to April 2011. The revisions portfolio beat similar portfolios based on more traditional factors, notching an annualized gain of 7%. The return in 2019 was 6%, with positive results coming from a combination of the long positions rising and the shorted stocks falling. "This factor has delivered an impressive track record both on an absolute and risk-adjusted perspective," Goldman said in a note to clients on Thursday. This type of portfolio, with similar weighting on the short and long sides, is often called a "sector neutral" portfolio because it is designed to capture performance unrelated to broader market moves. Two stocks currently in the long portion of the portfolio are Guidewire Software and Enphase Energy . The performance of the revisions portfolio was strongly correlated with that of a similar momentum factor portfolio, with many stocks present in both. However, the revisions portfolio was much less volatile, Goldman said. The revisions factor has been negatively correlated with the value factor over the last several years, Goldman said, and many of the stocks that were buys in one factor strategy were shorts in the other. That pattern of inverse overlap has changed recently, possibly setting up a rebound for the value strategy, Goldman said. — CNBC's Michael Bloom contributed to this story.

Financial professionals sit in the Goldman Sachs booth on the floor of the New York Stock Exchange.

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Tracking changes to expected sales numbers is one of the best ways to pick stocks, according to new research from Goldman Sachs.

Analysts at the bank set out to see if changes to revenue projections by analysts were a leading indicator of stock performance. The idea was to find out if this measurement, which the analysts referred to as the revisions factor, could be used in the same way as traditional factors such as momentum and value and provide an edge to investors.

To test this, Goldman sorted stocks based on recent changes to consensus revenue projections in FactSet. Analysts then created a hypothetical portfolio that was long the top 20% of stocks in each coverage area and short on the bottom 20%. This was rebalanced on a weekly basis, going back to April 2011.

The revisions portfolio beat similar portfolios based on more traditional factors, notching an annualized gain of 7%. The return in 2019 was 6%, with positive results coming from a combination of the long positions rising and the shorted stocks falling.