With just two weeks to go before 2019 is a wrap, the S&P 500 index of America’s biggest companies is getting ready to celebrate a banner year — up 24%. And that could be only the beginning.
Last week, Goldman Sachs chief U.S. equity strategist David Kostin opined that the U.S. economy is currently enjoying a “durable profit cycle” that should help ensure the “current bull market in US equities will continue in 2020.”
How do you plan to profit from it?
If you share Goldman Sachs’ optimistic view of the coming year, now might be a good time to begin buying a few stocks with double-digit profit potential. And as luck would have it, last week Goldman Sachs itself pointed out three such stocks worth examining — three companies, each of which’s stock has the potential to grow 15% or more over the next 12 months.
Running each equity through the Stock Screener tool at TipRanks, we’ve confirmed that Goldman Sachs is in the majority on Wall Street in recommending these shares. Here’s what you need to know about them.
Brinker International (EAT)
Dallas, Texas-based Brinker International is the parent company behind the well-known restaurant chains Chili’s Grill & Bar and Maggiano’s Little Italy. It’s a profitable business, albeit it’s struggled in recent years as consumers have gradually switched their eating (pun intended) preference away from casual dining and towards the fast food, fast casual, and delivery segments of the market.
As Goldman Sachs analyst Katherine Fogertey observes, “since 2010, Casual Dining traffic has declined every quarter by 2% on average.” Brinker has managed well against this trend — in some respects. Last quarter, for example, sales grew 4% at the company — but profits were down a rather drastic 44% year over year, and Brinker stock is lagging the S&P’s performance over the past year by a good 35 percentage points.
Why does Goldman expect the stock to turn around then, with the trend being so bad for casual dining restaurateurs? As Fogertey explains, Chili’s “just started to roll out third party delivery,” and she believes that “Chili’s can leverage third party delivery” to improve its sales of “off premise” — takeout — food sales. At the same time, inside the restaurants, Fogertey admires Brinker’s use of calendar-based promotions and menu innovations to drive sales, as well as its “streamlined operations” and innovations such as having staff share customer tips, to keep labor costs under control.
Goldman sees Brinker’s sales rising about 18% in total over the next three years, and its earnings 30%, which leads Fogertey to rate the stock a “buy” with a price target of $50 — 18% above where it trades today. (To watch Fogertey’s track record, click here)
Fogertey is broadly in line with the rest of Wall Street, which has assigned Brinker slightly more buy ratings than “holds” over the past month — and sees the stock growing about 17% over the next 12 months, to a target price of $49.55. (See Brinker’s stock analysis on TipRanks)
Bloomin’ Brands (BLMN)
Fogertey’s next pick likewise hails from the restaurant sector — Tampa, Florida-based Bloomin’ Brands, of Outback Steakhouse fame. Bloomin’ actually operates three other restaurant chains in addition: Carrabba’s Italian Grill, Bonefish Grill, and Fleming’s Prime Steakhouse. And in a sense, Bloomin’ has managed the decline in casual dining even better than Brinker has, with its sales also up (albeit a more modest 0.2% last quarter) and its profits more than doubling.
Probably largely due to the strong profits performance, Bloomin’ shares have held up better than Brinker’s, actually outperforming the S&P by a percentage point or two over the past year. But even so, Goldman Sachs sees the potential for more.
In a recent “buy” note, Fogertey initiated coverage of Bloomin’ with a $25 price target that implies there’s another 15% upside in the shares.
Fogertey explains that cost cuts and margin expansion are key to her buy thesis for Bloomin’, although she also sees the potential for “strategic alternatives” — often code for “selling the company” — to give these shares a lift.
Even absent a sale, though, Fogertey sees Bloomer’s strong positioning in states with lower minimum wages helping to keep its costs down. And as with Brinker, the analyst believes that savvy use of third party food deliverers can help Bloomin’ sell more delivery and takeout food — especially at Outback. And with Bloomin’ having “just introduced third party delivery in September at Outback,” investors could see these improvements show up in financial reports sooner rather than later.
TipRanks suggests optimism with some caution baked into expectations when it comes to Wall Street’s majority perspective on the dining chain’s stock. Out of 8 analysts polled in the last 3 months, analysts are split between the bulls and the fence sitters. That said, the consensus is that the shares should be good for a 9.5% profit as they climb to a $24 target price over the next year. (See Bloomin’ Brands stock analysis on TipRanks)
Bunge Limited (BG)
Last but not least, we shift gears a bit — and shift our focus up the food supply chain — with our final Goldman Sachs pick of the day: agricultural commodities producer Bunge.
One of America’s biggest agribusinesses, Bunge does $41.9 billion in sales every year — 10 times more than either of the restaurateurs already discussed. Yet, unlike those companies, Bunge’s sales actually declined last quarter — down 9.5%, and with no profits earned besides.
Regardless, Goldman analyst Adam Samuelson sees a lot to like in Bunge, which he calls “a unique self-help story” blessed with new management that has “undertaken a significant internal reorganization” of the company over the last several months.
Aiming to return Bunge to profitability and earning annual profits of $5 per share or more, Bunge’s new management is cutting selling, general, and administrative costs to the tune of perhaps as much as $150 million a year. They’re also working to grow volumes sold, and improve profit margins on sales. Meanwhile, on the financial engineering front, Samuelson expects the company to dispose of “unproductive assets” and use the cash to buy back stock, which would concentrate any new profits among fewer shares outstanding — improving earnings per share.
Assuming this all works out as planned, Samuelson sees Bunge stock rising to perhaps $67 a share within 12 months, which would equate to a 20% profit for new buyers of the stock. (To watch Samuelson’s track record, click here)
Wall Street is broadly in agreement with this analysis. Over the last couple of months, Bunge has received nothing but “buy” ratings from Street analysts. Indeed, with an average price target of $68.67 per share (23% upside), if anything, other analysts are more optimistic about Bunge, than is Goldman Sachs. (See Bunge’s stock analysis on TipRanks)