Goldman Sachs updated its Conviction Buy List, a compilation of the Wall Street bank’s favourite U.S. stocks, for 2011. Investors ought to review the following 10 picks, which offer the greatest 2011 upside potential, according to Goldman. Below, the stocks are ordered by return potential, from plenty to most.
Digital Realty Trust is a data-centre real estate investment trust, or REIT. Goldman initiated coverage of this sub-industry in December with 'favourable outlook' due to cloud-driven demand. It expects data-centre REITs to generate the best profit growth among real estate stocks over the next few years. Digital Realty is Goldman's favourite stock in the group due to recent underperformance. Digital Realty missed third-quarter consensus earnings by 0.8% and its stock corrected 4.7%. Still, 65% of Wall Street analysts rate the REIT 'buy.'
Crown Castle owns, operates, and leases wireless communications towers.
Recent lease modifications with carriers, including AT&T, are expected to bolster 2011 revenue. Given the company's history of exceeding rental revenue guidance, Goldman is bullish on the company's growth prospects and is forecasting rental revenue 2% above the top threshold of management's guidance and 77 cents of earnings in 2011. Its $54 target was derived by combining free and discounted cash-flow analyses, implying 24% upside.
Chicago Bridge & Iron is an engineering and construction company, focusing on infrastructure projects for oil-and-gas companies.
Goldman views it as a levered oil play. Crude oil is trading above $90 a barrel, currently, and demand is growing amid the global recovery. E&C backlogs are inflecting and Goldman expects investors to start paying higher multiples for stocks in the sector, with Chicago Bridge & Iron offering the most upside. Its stock trades at a forward P/E of 14 and a cash-flow multiple of 15, 34% and 35% peer discounts.
Sapient is a services company, selling advisory, analytics, and consulting services to businesses and government agencies.
It also operates technology outsourcing centres in India. Goldman has a $15.50 price target on the stock, suggesting an impending 12-month return of 27%. The stock returned 47% in 2010 and has delivered annualized gains of 11% since 2007. Sales and net income advanced 16% and 171% a year, on average, over that span. The stock trades at a forward P/E of 24, a 32% industry premium. The company has $187 million of net liquidity (total cash minus debt).
Blackstone is an alternative-investment company, structured as a publicly-traded partnership, which invests roughly $104 billion, of fee-generating assets, in private equity, real estate, and hedge funds.
The firm also has an advisory unit, offering merger and acquisition, restructuring and reorganization assistance. Goldman expects several of Blackstone's funds to surpass so-called high-water marks and to resume charging performance fees in 2011. It thinks funds could attract another $7 billion, to boot. The stock commands a discount forward P/E of 9.8.