We recently looked at Goldman Sachs’ 42 stocks with the highest consensus returns, or the highest consensus ROE. In this article, we’ll take a look at where Super Micro Computer, Inc. (NASDAQ:SMCI) ranks on the list.
As the fourth quarter of 2024 begins to settle down, the narrative around stocks on Wall Street is starting to change. This is not surprising since the start of the Federal Reserve’s interest rate cycle will change America’s economic landscape. These will naturally have an impact on companies, and along with financials, the outlook for cyclical stocks should also improve.
For example, consider two reports by investment bank Morgan Stanley. One of the announcements, released before the rate cut, addressed the bank’s thoughts on the stock market and the U.S. economy in September. The other one took place in October after the interest rate cut. In its September report, MS laid out three scenarios for the performance of its flagship S&P index for the rest of the year. In the best-case scenario, the index is expected to close at 5,650 points in the near term, while in the “attractive” and “fair” scenarios, it is projected to close at 5,200 and 5,350 points, respectively. Still, with a recent reading of 5,764, the market has outperformed even the best-case scenario.
The bank also shared that US inflation is finally coming down. This fact is explained through S&P’s second quarter results. In fact, according to MS, changes in inflation trends have pushed the index to its highest in the past 10 years, taking into account sales and profit surprises. The data shows that when inflation spiked in the fourth quarter of 2022, companies struggled with costs and were in the lowest quintile for EPS (net of unexpected pluses and minuses). This was despite being in the 70th percentile for positive and negative sales surprises during the same period. However, now that inflation has declined, Q2 earnings season data shows that EPS surprises were in the top quintile (over 80%), while earnings surprises were around 35%. It has decreased. This data covers the past 10 years and, as a result, shows the significant changes the market is currently experiencing.
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Since interest rates are the hottest topic on Wall Street, MS also commented on expectations for interest rates. At the start of September, the central bank assumed that the market expected a 100 basis point rate cut by the end of 2024. The bank said it believes “this appears to be aggressive unless the US economy has a hard landing, but this is not our base case.” Although a 50 basis point rate cut in September was averted, the market has an 85.5% probability of a 25 basis point rate cut at each of the November and December Fed meetings, and an 85.5% probability of a rate cut at each of the November and December Fed meetings, according to the CME Federal Watch tool. %, these predictions have not changed. 82.1% each. These pullbacks reflect the direction of the market, as the S&P’s 12-month total return was 30% when economic activity, as measured by the ISM Manufacturing Index, hovered around 67% in 2010, according to MS data. It is important in determining gender.
Shifting gears to the October report, MS notes that stocks have historically outperformed following the Fed’s first rate cut, rising valuations, and “consensus forecasts for EPS to accelerate rather than decline; “The upside for stocks after a rate cut could prove to be more limited this cycle.” However, the key stock market insight from the bank’s October report comes through its comments on cyclical stocks. MS shares that as the upward surprise in economic growth weakened from April to August, “sector and factor trends became more defensive, consistent with the slowdown in economic growth.” However, as the Citi Global Economic Surprise Index shows, this may no longer be the case. MS outlines that the index bottomed out at around -25 in August and rose to around -12 in September. This trend is reflected in the difference between cyclical and defensive sectors globally, with the measure rising as economic surprises surged.
Goldman Sachs believes that stock price quality is determined by economic growth and economic interest rates, so these factors are important when analyzing Goldman Sachs’ list of stocks with the highest expected ROE. . The bank recently raised its S&P 2024 closing price target to 6,000 points. This is the fourth revision to the target and is a significant increase from the previous estimate of 5,600 points. The rise was accompanied by optimism about the index’s returns. GS now expects S&P’s 2025 earnings to remain at $268, a 4.7% revision from its previous forecast of $256. However, the 2024 forecast remains unchanged, and its value of $241 means next year’s revenue will increase by 11.2%.
For the next 12 months, GS believes the S&P will remain at 6,300 points, representing 8.9% growth compared to its recent value of 5,779 points. MS data points to an increase in unexpected EPS as inflation is subdued, a view echoed by Goldman. The bank’s chief U.S. equity strategist, David Kostin, said the upward revision to EPS comes as “the macro environment remains conducive to modest earnings growth, with prices being charged above input cost growth.” This is because they share that it reflects the facts. “Over the past year, the performance of several quality factors has followed the broad trajectory of market views on growth and monetary policy,” the analyst outlined in a later note. “The market is likely to underestimate the probability of a significant weakening in the labor market, so strong employment trends may encourage some investors to move away from expensive ‘blue chip’ stocks to less popular lower priced stocks,” Kostin said. There is a possibility that they will switch to a quality company.”
our methodology
To create a list of Goldman Sachs stocks with the highest consensus ROE, we used the bank’s most recent 50-stock list and selected stocks with a consensus ROE of 5% or higher.
We also mentioned the number of hedge fund investors in these stocks. Why are we interested in stocks that hedge funds invest in? The reason is simple. Our research shows that by mimicking the top stock picks of the best hedge funds, you can outperform the market. Our quarterly newsletter strategy selects 14 small- and large-cap stocks each quarter and has returned 275% since May 2014, outperforming the benchmark by 150 points. (Click here for details).
Senior manager studying market indexes with a team of young stock market analysts.
Super Micro Computer Co., Ltd. (NASDAQ:SMCI)
Consensus ROE: 8%
Number of hedge fund investors in Q2 2024: 47
Super Micro Computer, Inc. (NASDAQ:SMCI) is a Taiwan-based provider of network and server products. In today’s AI era, where industry interest in data centers is increasing, the company’s business model means it can be one of the key enablers. As a result, Super Microcomputer, Inc. (NASDAQ:SMCI) stock price rose 316% between January and March, and 316% between January and the end of August, until short-selling reports alleged accounting manipulation and other fraud. It increased by 97%. Since then, the stock has fallen 16%, and hasn’t rallied even though Super Micro Computer (NASDAQ:SMCI) recently announced it is delivering 100,000 liquid-cooled GPUs to AI factories each year. . Part of this pessimism appears to be due to delays in annual report filings, as investors appear to be awaiting the results of the company’s internal control investigation.
Artisan Partners made some interesting comments about Super Micro Computer, Inc. (NASDAQ:SMCI) in its Q2 2024 investor letter. The fund says:
“Super Micro Computer leverages artificial intelligence to manufacture server racks for central processing units and GPUs that are in rapidly growing demand from cloud and enterprise customers. , met with them at their Milwaukee office in early 2023. However, given corporate governance issues, we do not consider this stock investable.
Overall, SMCI ranks 32nd on the list of stocks with the highest consensus ROE, according to Goldman Sachs. While we see SMCI’s potential as an investment, we believe some AI stocks are more likely to deliver higher returns and do so in a shorter time frame. If you’re looking for AI stocks that are more promising than SMCI but are trading at less than 5x earnings, check out our report on the cheapest AI stocks.
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Disclosure: None. This article originally appeared on Insider Monkey.
