Goldman breaks down the laggard trade and gives its comeback picks for first quarter 2024

Published Tue, Dec 5 20233:07 PM EST

Today's market-leading stocks may not have the luxury to sit on their laurels, according to Goldman Sachs. That's because there's a chance that this year's laggard stocks could take over to lead next year's first-quarter performance. "Over the past 21 years, there has been a tendency for calendar-year laggards to outperform in the subsequent first quarters," wrote analyst Deep Mehta in a report Monday. Specifically, 53% of laggard stocks have generally outperformed in the first quarter of the next year. Since Goldman Sachs began tracking the "Laggards" trade in 2022, the trend has held up 13 years out of 21, according to Mehta. The laggards have on average outperformed the S & P 500 by 130 basis points. A basis point is equal to one one-hundredth of a percent. The trend was especially strong in both the first quarters of 2021 and 2022. Laggards ended up underperforming the S & P 500 by 1% on average in 2023, but Mehta noted that they would have outperformed by 4.7% if not for March's regional banking crisis. Down 37% year to date, this year's cohort of laggards has faced some of the worst index-relative performance and is on pace to be close to levels seen only in 2007 and 2020, Mehta said. The stocks are also performing worse than the laggard group's long-term average of -26%. "Sector composition of laggards looks different this year vs. 2022: Healthcare, Financial and Industrials feature prominently, and from a factor perspective we note a tilt towards low financial returns, lower integrated scores (quality), inexpensive valuation and high growth." Mehta added. In contrast, the mix of tech, communication services and consumer discretionary stocks has fallen, accounting for 23% of laggards this year versus 50% last year. Mehta and his team identified five broad categories of stock laggards. The first, "differentiated buys," includes opportunities where Goldman Sachs analysts have out-of-consensus buy ratings. Stocks in this category include Best Buy , Extra Space Storage and Mosaic . The average analyst covering Mosaic has a hold rating on the stock and a potential upside of about 15%, according to LSEG. Last month, Barclays upgraded Mosaic to overweight from underweight, citing "an attractive entry point after recent relative underperformance." The "out of consensus" group includes buy-rated stocks such as CF Industries , Clear Secure and Chesapeake Energy , where analysts see "beat-and-raise" potential. The analysts also see downside risk to consensus estimates in sell-rated stocks such as Hormel Foods and Foot Locker . Shares of Hormel dipped 6% last month as the food processing company fell short of its fiscal fourth-quarter earnings results. On the other hand, Foot Locker topped analyst expectations in its third quarter in November, and it wrapped the month with a 28% jump. The "growth at a reasonable price" group included laggards with at least 10% expected sales growth such as Shoals Technologies Group , Biomarin Pharmaceutical and Bumble . Norfolk Southern , Bath & Body Works and Mohawk Industries had "rebounding margins," or operating margins that came under pressure in 2023 but are expected to bounce next year. Finally, Goldman Sachs analysts also identified stocks with a "track record of CROCI [cash return on capital invested] generation," a metric that evaluates a company's cash return against its total equity. These names included Bristol-Myers Squibb , Honeywell International and United Parcel Service . — CNBC's Michael Bloom contributed to this report.