Goldman Sees 12 ‘Crowded’ Stocks Leading Amid Trade Wars

In a contrarian see, Goldman Sachs says 12 ‘crowded’ stocks held heavily by both mutual funds and hedge greens are likely to dramatically outperform the rest of the market amid two escalating U.S. trade wars. These ‘shared favorites’, in vogue among both mutual and hedge funds, come from a strikingly broad range of industries such as airlines, rope, financial payments, health care and tech, and they include Adobe Inc. (ADBE), Booking Holdings Inc. (BKNG), Citigroup Inc. (C), Comcast Corp. (CMCSA), Salesforce.com (CRM), Delta Airlines Inc. (DAL), Mastercard Inc. (MA), ServiceNow Inc. (NOW), PayPal Holdings Inc. (PYPL), Unitedhealth Accumulation Inc. (UNH), Visa Inc. (V), and Alphabet Inc. (GOOGL),

“The underperformance of popular positions today following President Trump’s announcement of tariffs on intentions from Mexico underscores investor concern about crowded positions,” said Goldman in its latest US Weekly Kickstart check in. But, “Despite posing a tactical risk, concentrated ownership has generally been a positive signal for subsequent stock takings,” added Goldman.

To be sure, any individual stock in this categorize may be pulled down by negative forces, such as Alphabet, whose shares fell sharply on Monday on news that the U.S. administration is launching an anti-trust probe into the company.

But Goldman’s popular stocks have done well as a group. Its portfolio of share in favorites from hedge funds and mutual funds has posted an 18% return year to date, way ahead of the 13% repayment of Goldman’s hedge fund VIP basket and also ahead of the mutual fund basket’s 15% return. The median handle within the current list of shared favorites is expected to grow 2019 sales by 16% and earnings by the same amount, far faster than the development rate of the hedge fund or mutual fund baskets. Goldman says the shared favorites are also expected to take higher margins. However, the median stock in the shared favorites group has a dramatically higher price-to-earnings ratio of 26.

Sundry investors worry that overly popular stocks are risky bets as they often are overvalued and offer minimum prospects for further price appreciation. But historical data tells a different story. In the case of most popular hedge hard cash holdings, Goldman found that in 65% of the quarters since 2009, the top 20% — or most popular stocks — based on total of hedge fund owners outperformed the least popular, bottom 20%.

Goldman also found that popular, high-valuation sources have posted a median 12- month return of 13%, much better than the median 8% return for avoided, low valuation stocks. 

There is a caveat. Goldman warns that crowded positions have typically underperformed during falling equity markets. The shared favorites portfolio has outperformed in 60% of the weeks in which the S&P 500 has posted a persuasive return since 2013, but it has outperformed in just 44% of the weeks where the S&P 500 had posted a negative return. If the profession war escalates enough to spark a bear market, investors may want to shy away from crowded positions.