S&P 500 operating leverage is the highest it's been in a decade. That's one reason Goldman expects a strong recovery in earnings.
Getty Images / Handout
Goldman Sachs' US equity chief David Kostin says companies with higher operating leverage will continue to outperform in 2021.
Those companies experience larger-than-average profit growth as their revenues improve, and that could be a key theme as the economy bounces back.
Kostin adds that for the S&P 500 as a whole, operating leverage is the highest it's been in 10 years.
Visit Business Insider's homepage for more stories.
One of the most important questions for investors in 2021 is how to bet on the ongoing economy recovery - even if its course
looks uncertain right now.
Goldman Sachs is giving its answer.Chief US Equity Strategist David Kostin says he expects success for companies with high
operating leverage, or the companies that will experience proportionately greater growth in their profits as their revenues increase. That means they should benefit the most as economic activity increases."Our high Operating Leverage basket has outperformed the S&P 500 by 9 pp (+18% vs. +9%) since November 9th when
Pfizer-BioNTech released the surprisingly efficacious
phase 3 vaccine results," he wrote in a note to clients. "Stocks with high operating leverage will likely continue to outperform as corporate revenues recover."Kostin writes that overall, S&P 500 operating leverage is the highest it's been in a decade. That's one reason he expects a stronger recovery in earnings than most Wall Street experts do."Even absent any cost controls, an economic and revenue recovery - benefitting from increased fiscal stimulus and widespread vaccinations - should lead to an even stronger earnings rebound," he said. "Our 2021 S&P 500 EPS forecast of $178 stands well-above consensus of $167."Kostin and his team assessed S&P 500 stocks based on their operating leverage, as measured by their comparatively low costs of goods sold; depreciation expenses; and selling, general and administrative expenses. Those low expenses mean larger profits for them as revenues ramp up.Kostin's high-leverage group exclude financial and utility companies because of their different financial metrics and business models. He says the median
degree of operating leverage for S&P 500 companies is 2.7, while the median degree for the top 50 companies listed by Kostin is 5.9.The companies listed below all meet or exceed the median the group Kostin writes about. They're ranked from lowest to highest based on their degree of operating leverage.
Read more:
Legendary investor Bill Miller compared marijuana legalization to the early days of gambling and shares the one pot stock he's betting on to soarAn ex-Goldman trader whose firm helps investors navigate market chaos just passed $1 billion in assets after converting her hedge fund into an ETF$138 billion megafund AQR shares a step-by-step guide for investors who want to reduce their portfolios' carbon footprints - and explains why this move could propel returns in the long run 25. Ingersoll Rand
Markets Insider
