Goldman Sachs Fools Small Investors Again?

Most analysts and investors place stocks into three main categories: Buy, Hold/Neutral and Sell. Goldman Sachs Group Inc (NYSE:GS) has one extra group of elite stock picks which it calls the “Conviction Buy List”. This list, which is updated on a regular basis, contains Buy-rated stocks that Goldman analysts are particularly bullish on. An investor might think that if a stock is on that list then it’s a good investment. So, if these picks are so good, why would Goldman give these tips for free (although the list is available only to customers, many of the picks end up in the press anyway)?

In the beginning of 2017, Goldman Sachs was bullish on the technology sector and added Alphabet Inc Class A (NASDAQ:GOOGL), Amazon.com, Inc. (NASDAQ:AMZN), Paypal Holdings Inc (NASDAQ:PYPL) and Pandora Media Inc (NYSE:P). Alphabet, Amazon and Paypal stocks have performed admirably throughout 2017, while Pandora was a big loser, having ended the year 62% in the red. Still, when combined, these 4 stock picks returned an average of 27%, surpassing the 18% return of S&P 500.

Goldman’s Conviction Buy List is also famous for several blunders, including the addition of Radio Shack in August 2011 when the stock was trading at $14 a share, a level it never surmounted after that, and keeping Apple Inc. (NASDAQ:AAPL) on the list during the 2012-2013 decline and removing it afterwards, only to watch the stock soar.

It has been four months since the report of Goldman’s top picks for 2018 surfaced, so Insider Monkey decided to take a look at some of the names that made their way into the press. Goldman’s top 10 picks lost an average of more than 8% since the publication of the report vs. a loss of 3% for the S&P 500 Index. Insider Monkey’s flagship investment strategy, on the other hand, gained 0.3% since the publication of Goldman’s top stock picks for 2018 (see our flagship strategy’s latest picks here). On the next page you can see names and performances of Goldman Sachs’ top stock picks for 2018:

In its note to investors, Goldman Sachs has put special emphasis on the financial sector. For 2018, Goldman was very bullish on one of Warren Buffett’s favorite stocks – Bank of America Corp (NYSE:BAC). According to Goldman analysts, the bank stands to benefit greatly from increasing interest rates thanks to its large book of floating-rate loans and its solid deposit franchise. They also predicted Bank of America Corp (NYSE:BAC) and Wells Fargo & Co (NYSE:WFC) would boost their share repurchase programs by 34% and would increase dividends by approximately 19% citing the banks’ stress tests’ results.

So far Bank of America Corp (NYSE:BAC) has not performed as expected and is currently down by approximately 4% since Goldman issued its updated Conviction Buy list. BofA posted its strongest quarterly profit ever when it issued its earnings report for the 2018 first quarter. The bank hauled in $6.9 billion in profit thanks to lower tax rates, solid economic climate both at home and abroad, and the recent turbulence in the market as investors rushed to execute trades and adjust their positions. Market participants were not particularly happy with the fact that BofA surpassed earnings expectations thanks to cost cutting, rather than stronger lending, and have pushed the stock lower.

Wells Fargo & Co (NYSE:WFC) is another large cap financial institution that Goldman analysts were optimistic about. In their note to investors they projected a 10% rally in 2018, expecting the bank to increase its share buyback program, as well as its dividend. Also, Goldman was sure Wells Fargo would put its regulatory hurdles behind. They got the latter horribly wrong. Wells Fargo & Co (NYSE:WFC) shares took a nosedive on February 5, when the Federal Reserve announced it would impose further penalties on the bank and was prohibiting it from growing any larger than the total assets as of the end of 2017.

Four months later and Wells Fargo & Co (NYSE:WFC) is still marred by controversies. The US Labor Department is investigating whether the company pushed participants in low-cost 401(k) to roll them into more expensive plans. The banks has also been ordered to pay a $1 billion fine for misdeeds related to confusing insurance practices. WFC stock ended Tuesday’s session at $52.56 per share, down 16% since it was added to Goldman’s list.

In its note to investors, Goldman said it expected Metlife Inc (NYSE:MET) to appreciate by 14% by the end of 2018. The insurance giant has been investing heavily in cost saving technology and Goldman analysts believed the investment would start to really pay off. On top of that, less volatile business conditions were expected to have a positive impact on profitability and Goldman estimated that Metlife would add 100 to 150 basis points to its ROE by 2020. Analysts also noted that increasing interest rates 10-year Treasury notes would provide a windfall for Metlife.

The year started well for Metlife Inc (NYSE:MET) as it registered a huge legal victory against US regulators that wanted to include the company in the “too big to fail” group, which would have implied much stricter regulation. On January 19, the Trump administration dropped the case. At the end of January, Metlife announced it was setting aside $575 million in order to “strengthen reserves”, a term Warren Buffett once called the “ugly twin of loss development.” This announcement came after the company said in December 2017 that it lost track of some of its annuity and pension clients that changed their jobs or relocated. Metlife Inc (NYSE:MET) plunged nearly 9% on January 30 and has since then failed to recover the lost ground. Shares have ended Tuesday’s trading session at $47.30 apiece and is down by 11% since Goldman issued its note to investors.

Goldman Sachs analysts were also particularly bullish on machinery stocks, writing that they presented “a particularly compelling opportunity in 2018 as the industry continues to emerge from a cycle trough.” Deere & Company (NYSE:DE) was identified as the top dog in this category. Goldman estimated an upside potential of 27% for the industrial giant, pointing at strong operating leverage and expanding profit margins. Furthermore the company was set to greatly benefit from its high R&D investment and capital spending.

So far, Deere & Company (NYSE:DE) has failed to live up to the hype. The stock has been losing value slowly but steadily and is currently down by 20% since Goldman issued its report. Investors have been driving the stock lower as the trade spat between US and China picked up steam. China announced plans to retaliate to US steel tariffs, by imposing tariffs on $50 billion worth of US imports, including a wide range of agricultural products. If farmers expect a decline in demand for their goods, they might postpone plans to renew their farming machinery and equipment.

Caterpillar Inc. (NYSE:CAT) was another industrial goods stock that Goldman added to its Conviction Buy List in January. On top of strong operating leverage, Goldman analysts predicted Caterpillar would benefit greatly from the changes in the US tax code and the company’s efforts to increase productivity and reduce costs. Goldman projected Caterpillar Inc. (NYSE:CAT) stock to appreciate by approximately 21% in 2018.

As with the other stocks discussed so far, things have not yet gone according to Goldman’s plan. Caterpillar Inc. (NYSE:CAT) entered a downtrend amid the broader market selloff in February and has been heading south ever since. Even its better-than-expected earnings report for the 2018 first quarter and an improved outlook failed to push the stock higher, now approximately 15% in the red since Goldman’s recommendation.

Analysts at Goldman Sachs had also identified the defense industry as a top performer in 2018. “Defense stocks should outperform again in 2018 as growth continues to exceed expectations,” said Goldman. The firm’s number one stock in the defense industry was Northrop Grumman Corporation (NYSE:NOC), for which it projected 10% average annual revenue growth over the next decade. Back in October 2017 Goldman had also heaped praise on Northrop Grumman, pointing to the company’s strong operating results and improved outlook.

Northrop Grumman Corporation (NYSE:NOC) stock continued its stellar performance during the first quarter, setting an all-time high of $360.88 in the beginning of April, up 14.5% from the day Goldman sent its note to investors and just shy of its 16% forecast. Everything went downhill on April 24, when Northrop Grumman Corporation (NYSE:NOC) published its first quarter financial report. Although the company surpassed Wall Street’s expectations for earnings and revenue, investors were also looking for an improved cash flow and sales guidance, which did not materialize. Northrop Grumman also said it was dropping out of the race for Air Force’s GPS 3 satellites contract. Since then, the stock has been falling and is now close to start-of-the-year level of $305 per share.

There is one more defense stock Goldman analysts had on their Conviction Buy list in January: L3 Technologies Inc (NYSE:LLL). Goldman said the stock was deeply undervalued compared to its peers on the basis of Free Cash Flow yield, Price to Earnings ratio and the Enterprise Value to EBITDA ratio. The firm also estimated a 9% upside potential for L3 Technologies in 2018.

L3 Technologies Inc (NYSE:LLL) established its all-time high at $218.71 on January 29 and then continued to trade sideways, only to enter a selloff last week together with the rest of the defense industry. The company released its first quarter financial report on Tuesday, managing to surpass Wall Street’s expectations. The better-than-expected results failed to prop up the stock, however, and it fell 5% during Tuesday’s session. L3 Technologies Inc (NYSE:LLL) is currently down by 10.7% since Goldman’s note to investors.

Disclosure: none.