DKosig
Consumer and tech offer the best opportunities for stock picking on the long or short side when looking at dispersion, the Goldman Sachs equity team says.
Dispersion looks at the range of potential returns for a group of stocks, with high dispersion away from the benchmark creating a more favorable environment for picking stocks.
“For mutual funds, the healthy stock-picking environment has led to solid returns, with 46% of large-cap mutual funds beating their respective benchmark year to date, greater than the typical 38% hit rate of outperformance,” Kostin said. “Large-cap mutual fund managers have benefited in part from their large underweights in AAPL and TSLA. Hedge funds, whose returns are also linked to S&P 500 (NYSEARCA:SPY) (IVV) (VOO) return dispersion, have also posted a strong start to the year.”
“The Magnificent 7 stocks (AAPL) (AMZN) (GOOG) (META) (MSFT) (NVDA) (TSLA) have collectively returned 9% YTD, but the dispersion of returns among the individual stocks stands at a 10-year high,” he added. “On one end of the spectrum, NVDA has returned 87% YTD on the back of its strong 4Q earnings report and sustained investor optimism surrounding AI. On the other end, TSLA has plunged 28% amid softer EV demand while AAPL has declined by 12% following news reports of weak China sales.”
Goldman identified stocks with “the most attractive combination of micro-driven returns and firm-specific risk.”
“We calculate a ‘dispersion score’ for each S&P 500 stock to identify the best stock-picking opportunities going forward,” Kostin said.
The score is calculated based on the “proportion of trailing returns explained by micro, company-specific factors as opposed to macro drivers” and a forecast of the volatility associated with the portion of returns attributable to those micro factors.”
“Dispersion scores reflect alpha opportunity, but not in a direction,” Kostin said (emphasis added). “Stocks with high dispersion scores are as likely to generate large alpha through underperformance as through outperformance.”
“The Consumer Discretionary (XLY) and Information Technology (XLK) sectors offer the best stock picking opportunities based on our dispersion framework,” he added. “In contrast, the median stocks within Real Estate (XLRE) and Utilities (XLU) are more macro-driven and have the lowest dispersion scores, indicating less alpha-generating opportunity.”
Goldman highlighted 25 stocks with the highest dispersion score.
- Monster Beverage (MNST), dispersion score 16.9
- DexCom (DXCM)), 10.9
- Akamai Technologies (AKAM), 10.7
- Centene (CNC), 10.1
- Align Technology (ALGN), 9.8
- Intuitive Surgical (ISRG), 9.4
- Illumina (ILMN), 9.3
- Axon Enterprise (AXON), 8.8
- Intercontinental Exchange (ICE), 8.7
- Regeneron Pharmaceuticals (REGN), 8.7
- Monolithic Power (MPWR), 8.6
- Vertex Pharmaceuticals (VRTX), 8.5
- Incyte (INCY), 8.1
- Nasdaq (NDAQ), 7.9
- Netflix (NFLX), 7.8
- Take-Two Interactive (TTWO), 7.4
- Builders FirstSource (BLDR), 6.9
- United Airlines (UAL), 6.8
- Las Vegas Sands (LVS), 6.8
- Old Dominion Freight (ODFL), 6.4
- ON Semiconductor (ON), 6.2
- Advanced Micro Devices (AMD), 6.1
- Garmin (GRMN), 6.1
- Hologic (HOLX), 5.9
- Western Digital (WDC), 5.9
