Goldman: These stocks with high profit margins could rally more than 70%

Published Sun, Dec 26 20216:26 PM EST

On Goldman Sachs ' global conviction list — the crème de la crème of its buy-rated stock picks — there are a number of stocks with high profit margins and serious potential upside, according to the investment bank. Gross margin — the percentage of revenue left after accounting for the cost of goods sold — is a closely-watched profitability metric. It can be used to determine a company's pricing power (its ability to maintain or raise prices without hitting demand), making it particularly key in the current inflationary environment . Here are four stocks from Goldman's conviction list that have a gross margin of more than 50% and potential upside of more than 70% to their share prices, according to the bank: Activision Blizzard Goldman said on Nov. 3 that videogame titian Activision Blizzard 's "earnings power remains intact" despite delays in the launch of two of its upcoming video games. Analyst Michael Ng added that the company should benefit from the launch of Call of Duty: Vanguard, the largest content update for Call of Duty: Warzone to-date, and the World of Warcraft modern expansion. Other positives cited by the analyst include the launch of Diablo Immortal, continued momentum for Hearthstone and the testing of new Warcraft mobile games. Goldman puts the company's gross margin at 75.3% for the year and has ascribed a price target of $111 on the stock, or about 70% upside from its closing price of around $65 on Dec. 23. Taiwan Semiconductor Manufacturing Company (TSMC) Goldman's analyst Bruce Lu noted on Oct. 14 that Taiwan Semiconductor Manufacturing Company had raised its guidance for long-term gross margin target to "50% and higher." The bank expects the company to achieve higher profitability and an "even better margin outlook" on the back of a price hike for the bulk of its customers in 2022. Goldman puts its gross margin at 51.5% this year. It has a price target of 1,028 Taiwanese dollars on the stock — an implied upside of 70% to its closing price of 606 Taiwanese dollars on Dec. 23. Jeisys Medical South Korean medical device manufacturer Jeisys Medical also turned up on the screen of Goldman conviction list stocks with strong margins and upside potential. The company delivered "robust earnings growth" for the third quarter ending September, analyst Sangsoo Kim said on Nov. 11. Healthy growth in sales of key devices also reflect the company's "rapid pace" of growth in the nascent stage of product growth cycles, he added. Kim believes the market is not fully aware of Jeisys' multiple long-term growth opportunities. The bank has forecast revenue and earnings compounded growth of 36% and 64% over a three-year period. Goldman puts the company's gross margin at 69.7% for the year, and has a price target of 19,200 Korean won ($16.18) on the stock. Shares in the company closed at 7,770 Korean won on Dec. 23, representing a potential upside of 147%. Jiumaojiu Hong Kong-listed Jiumaojiu is the only one of four Chinese restaurant chains under Goldman's coverage to be rated "buy" by the bank. Goldman analyst Michelle Cheng noted the company's profitability resiliency in a note on Dec. 6 against the backdrop of multiple headwinds. The bank is "positive" on the company's multi-brand strategy, as well as the upside from market share gain in the fast-growing Chinese sauerkraut fish segment which its Tai Er brand operates in. The bank expects the company to open 1,247 Tai Er stores by 2026. Goldman puts the company's gross margin at 62.8% for the year and has a price target of 31 Hong Kong dollars ($3.97) on the stock, which closed at around 13 Hong Kong dollars on Dec. 23 — an implied upside of 136%.

Brendan McDermid | Reuters