As one of the world’s largest and oldest investment banking firms, the opinions of financial analysts at Goldman Sachs Group Inc (NYSE:GS) carry significant leverage on Wall Street.
Due to its exclusive clientele of affluent individuals and professional traders, much attention is paid to its analysts’ price targets and performance forecasts for various publicly traded companies.
Earlier this week, Goldman Sachs released its list of today’s cheapest stocks for immediate consideration, which feature a total of 40 companies with large upside potential. Of this sum, John C. Ogg of 24/7 Wall Street took a look at six of the best, sorted out by sector, which you can (and should) read about here.
The industry diversity of the picks, which range from a coffee company to an airliner to a biotech firm, theoretically should provide ample ammunition for adherents of portfolio theory. If nothing else, the fact that these companies made Goldman’s Top 40 list is worthy of at least a modicum of contemplation.
Still, as Mr. Ogg rightfully points out, investors should be cautious about jumping in on an opportunity simply on the recommendation of a marquee name. An independent and quantifiable analysis should be conducted to verify the veracity of Goldman’s — or anyone’s — prognostications.
Here, we’ll take a look at four of these cheap stocks through the eyes of probability, and see if any are worth chasing down.
4 Cheap Stocks on Goldman’s List: Chesapeake Energy Corporation (CHK)
However, historical performances suggest a split between near-term and long-term outlook. Over the past month, CHK has gained an average of 2.3%. Statistically, similar velocities in the past have resulted in bullish moves over the next month 75% of the time, for an average profit of 11.3%.
Applying the same analysis over a longer time period — three months to be exact — results in far less desirable probabilities. Given CHK’s volatility over the past 90 days, the oil producer has less than a 33% chance of being profitable by the second week of July.
The bottom line for potential Chesapeake investors is that this is very much a speculative opportunity. Play it hard, play it fast, and don’t look twice when you dump it!
4 Cheap Stocks on Goldman’s List: Delta Air Lines, Inc. (DAL)
Wall Street may be smoking some of the funny stuff on this one.
Technically speaking, DAL’s recent price action has failed to spark confidence since the market peaked at $50.46 earlier this year. This overall negative trajectory has led to an average monthly performance of -1.13%.
Given similar occurrences since Delta’s initial public offering, there is a 42.5% chance that shares will be profitable by the second week of May. The glass-half-full perspective is that when DAL does move positively, the average gain is nearly 10% as compared to an average loss of 5.7% when things go sour.
Despite the favorable risk-reward component, Delta’s nominal odds for winning as a long investor is less than 50%. A potentially better alternative is to straddle DAL options contracts to play the magnitude of the market as opposed to placing a directionally-biased wager.
4 Cheap Stocks on Goldman’s List: Keurig Green Mountain, Inc. (GMCR)
But the statistical verdict is somewhat mixed. Despite some choppy price action over the past 90 days that resulted in Keurig shares averaging -0.9%, the probability is technically favorable with 55% odds that the market will move higher over the next three months.
Even better, when GMCR shares rally, the average gain is 15.2%, as compared to an average loss of 7.8% when shares collapse. This means that the risk-reward component almost twice favors the bulls over the bears.
However, to reap those potential benefits, the market only offers a 5% advantage above random luck. Like Delta shares, interested investors may want to consider an options strategy to trade magnitude as opposed to direction.
4 Cheap Stocks on Goldman’s List: Lam Research Corporation (LRCX)
However, it happens to be the most intriguing opportunity of the six stock picks.
LRCX has a three-month average performance of -1%, thanks largely to volatile sessions in March. Despite this setback, its three-month outlook is nominally bullish, with a 57.5% probability that valuations will rally.
Should the bulls happen to be on the right side of the trade, the prize is quite lucrative, averaging gains in excess of 23%. However, should they be wrong, average losses are north of 17%.
Lam is a gamble as its half-year price chart can attest. But that is the charm of its equity market — go big or go home! Based on the forecasted magnitude of the stock, LRCX is a prime candidate for advanced options strategies.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.