Throughout this year, investment in stocks has suffered large losses in most sectors. But there is a curious fact that Goldman Sachs has analyzed for the last 20 years. It turns out that the stocks that have lagged throughout the previous year are the ones that lead the results of the first quarter of the following year. Goldman Sachs calls this event the “laggard operation,” where it has occurred in 13 of the last 20 years that they have been observing. Let's see then which sectors and companies are running to be lagging operation candidates to position our investment portfolio in stocks.
How does the laggard operation work?
At first glance it may seem like a corruption plot like Gürtel, EREs of Andalusia or hundreds of others (a classic of Spanish politics), but it is not like that. Let's see, for example, how lagging operations were during the previous year for investing in stocks. The laggards of the year 2021 generated a 29% lower return than the S&P 500 but gained 5,6% during the first quarter of this year 2022, being the third best year for the laggards since 2002.
As we can see in the graph above, laggards usually outperform the S&P 500 during the first quarter of the following year by an average of 1,4%. Of course, the laggard operation contemplates that they beat the S&P 500 during the first quarter, but the rest of the year they usually return to their previous returns. Therefore, the laggard operation is a short-term strategy, it is not advisable to maintain it for an entire year.
Which sectors have lagged behind this year?路♂️
Within the lagging operation, the sectors that are positioned as candidates are the technology, healthcare and consumer discretionary sectors. These three sectors represent 66% of laggard stocks, compared to 48% in 2021. Goldman's strategy for laggards suggests to us that they are likely to deliver strong returns during the first quarter of 2023.
And what kind of stocks have been left behind?
1. Lagging stocks with strong cash flows (FCF).
Companies with strong free cash flows (FCF) are a viable option in times of uncertainty. This is because the company is known to have gone through many market cycles and continues to deliver good returns to shareholders. Goldman compiled a list of stocks that currently have an FCF margin of 5% or higher and are expected to expand that margin by at least one percentage point in 2023 and 2024. The analysts also added a valuation metric in the form of yield. FCF of at least 5% in 2023.
2. Laggardly stocks with solid revenue growth at cheap prices.
Fears about the global economic slowdown have wreaked havoc on some businesses. That's why Goldman has looked at lagging stocks that it expects to deliver at least 10% revenue growth in 2023 at a current cheap valuation based on enterprise value to 12x EBITDA or lower.
3. Lagging stocks with profit forecasts that are too low.
Clearly profits are the focus of investing in stocks. From Goldman they think that upward revisions and beating profit expectations are of great help for some lagging stocks. With these characteristics, Goldman has analyzed stocks that they predict will offer higher EPS or EBITDA than most for the last quarter of 2022 and for the full year of 2023.
4. Undervalued laggard stocks.☹️
From Goldman they have analyzed a series of stocks that have a neutral or sell rating in consensus with the rating firms. Specifically, this list is made up of 16 actions. These shares are considered undervalued, so they could ensure at least 10% profitability for investors for the next quarter.
How do we take advantage of this opportunity?
As we have seen throughout this article, the laggard operation is postulated as a good short-term investment strategy for the beginning of this year 2023. Of course, let us remember again that it is a valid strategy for the first quarter of the year, not to maintain it throughout an entire year. We could invest in a diversified basket of assets that we have seen meet Goldman Sachs' analysis metrics. Although we could make our task easier by investing in stocks through ETFs of the lagging sectors that we mentioned at the beginning. To take advantage of this advantage, we can invest in the iShares S&P 500 Information Technology Sector UCITS ETF (IUIT), the iShares S&P 500 Consumer Discretionary Sector UCITS ETF (IUCD) or the iShares S&P 500 Health Care Sector UCITS ETF (IUHC). In this way, we can take advantage of the laggard operation with a diversified basket of assets from the laggard sectors that can offer us good returns for the first quarter of 2023.