Goldman sees one of its portfolios for clients tripling the return of the market next year


Traders work on the floor of the New York Stock Exchange (NYSE) on July 10, 2019.

Spencer Platt | Getty Images

After a record-breaking 2019, Wall Street generally expects much more modest gains for stocks next year. But for investors looking for ways to beat the market, Goldman Sachs has a portfolio that it expects to triple the market’s return in 2020.

The bank is recommending clients stocks with high Sharpe ratios, a measure of a stock’s performance relative to its volatility. Stocks in its 50-name high Sharpe ratio basket are forecast by the firm’s analysts to generate a median 17% return over the next 12 months, about three times the firm’s S&P 500 forecast of 6%.

“Our high Sharpe Ratio basket typically has a value tilt and often contains some constituents that have experienced substantial price declines and have high upside to consensus price targets,” David Kostin, Goldman’s chief U.S. equity strategist, said in a note on Friday.

Goldman uses consensus 12-month price targets and options six-month implied volatility to measure Sharpe ratios. The portfolio has a track record of beating the market, Goldman said. It has outpaced the S&P 500’s return by 5.7 percentage points on average during the last 20 years, and it outperformed the market by 4 percentage points this year, returning 32%.

The S&P 500 is up more than 28% this year, about 1 percentage point away from 2013′s gain of 29.6%. The easing trade tensions between the U.S. and China and receding recession fears have led to a rush into equities at the year-end. For 2020, Wall Street analysts are mostly seeing smaller gains with an average target of 3,330, which represents a gain of about 4% from here, according to the CNBC Market Strategist Survey.

Energy and real estate sectors will deliver the most upside next year — 21% and 9% returns respectively — after their underperformance in 2019, Goldman said. Stocks in Goldman’s high Sharpe ratio basket include Netflix, T-Mobile, Coca-Cola, Citigroup, Visa and VeriSign.

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