We recently looked at the Goldman Sachs stocks with the highest consensus returns: 42 stocks with the highest consensus ROE. In this piece, we will look at where T-Mobile US, Inc. (NASDAQ:TMUS) is listed.
As the fourth quarter of 2024 approaches, the narrative around stocks on Wall Street is starting to shift. This is not surprising, as the onset of Federal Reserve interest rate cycles will change economic conditions in America. These will obviously impact companies, and cyclical stocks and financials should see better prospects.
Take, for example, two reports from investment bank Morgan Stanley. One was released before the rate cut and discussed the bank’s thoughts on the stock market and the US economy for September. The other came in October, after the interest rate cut. In their September report, MS outlined three scenarios for the performance of the flagship S&P index for the remainder of this year. The best case scenario assumes the index would close at 5,650 points in the near term, while the ‘attractive’ and ‘fair’ scenarios predict a close of 5,200 and 5,350 points respectively. Still, the market has performed even better than the best-case scenario, as the recent reading is 5,764.
ALSO READ 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock
The bank also shares that inflation in America is finally falling. This fact is explained by S&P’s second quarter earnings figures. In fact, changing inflation trends over the past decade have set new highs when factoring in revenue and earnings surprises for the index, according to MS. The data shows that when inflation soared in the fourth quarter of 2022, the balance of positive and negative EPS surprises was in the bottom quintile as companies struggled with costs. This is despite the fact that during the same period the net result of positive and negative revenue surprises was in the 70% percentile. However, as inflation has fallen, second-quarter earnings season data shows that earnings per share were in the top quintile (above 80%), while the revenue surprise had fallen to around 35%. This data covers the past decade and as a result illustrates the momentous shifts the market is currently undergoing.
With interest rates being the hottest topic on Wall Street, MS also commented on its expectations on this matter. At the start in September, the bank said markets expected a 100 basis point cut by the end of 2024. The bank shared that it believed “this looks aggressive unless the U.S. economy has a hard landing, but this is not our base case.” Now that the 50 basis point cut in September is no longer possible, these expectations have remained unchanged. The CME Fed Watch Tool shows that for the Fed’s November and December meetings, the market has pegged the odds for a 25 basis point cut in both meetings at 85.5%. 82.1% respectively. These cuts are important in setting the direction of the market, as data from Member States shows that when economic activity as measured by the ISM Manufacturing Index stood at ~67 in 2010, the S&P’s total return over twelve months was 30%.
Based on the October report, MS warn that while stocks have historically outperformed following the Fed’s first rate cut, higher valuations and “consensus forecasts of an acceleration in earnings per share rather than a decline, shares after the first cut could prove more limited this cycle.” However, the bank’s key insight into the stock market from its October report comes from its comments on cyclical stocks. MS advises that as the upside economic growth surprises weakened from April through August, “sector and factor trends turned defensive, consistent with softer economic growth.” However, this may not be the case in the future, as evidenced by the Citi Global Economic Surprise Index. MS outlines that this index bottomed out in August at a value of ~-25, rising to around -12 in September. This trend was reflected in the divergence between the global cyclical and defensive sectors, with the numbers also rising as economic surprises increased.
These factors are crucial when we analyze the list of Goldman Sachs stocks with the highest expected ROE, because the bank believes that the quality of the stocks will be determined by economic growth and economic interest rates. The bank also recently raised its 2024 closing target for the S&P to 6,000 points. This was the fourth revision of the target and a significant increase from the previous estimate of 5,600 points. This increase was also accompanied by optimism about the index’s gains. GS now believes S&P earnings for 2025 will be $268, a 4.7% revision from the previous estimate of $256. However, the 2024 estimate is unchanged and the $241 value implies earnings will grow 11.2% next year.
As for the next twelve months, GS believes the S&P will remain at 6,300, representing growth of 8.9% from the recent reading of 5,779. Because MS data shows that earnings per share surprises increase as inflation declines, Goldman believes so too. This comes as David Kostin, the bank’s chief U.S. equity strategist, shares that the upward revision to earnings per share reflects the fact that “the macro environment remains conducive to modest margin expansion, with prices moving higher than the growth of input costs.” In a later note, the analyst outlined: “Over the past year, the performance of several quality factors has followed the broad trajectory of market views on growth and monetary policy.” Kostin added that “positive job pressures could prompt some investors to swap expensive ‘quality stocks’ for less favored, lower-quality companies, as the market would likely see a lower probability of a substantial weakening in the labor market.”
Our Methodology
To create our list of Goldman Sachs stocks with the highest consensus ROE, we used the bank’s most recent list of 50 such stocks and chose those with a consensus ROE of 5% or higher.
We also reported the number of hedge fund investors for these stocks. Why are we interested in the stocks that hedge funds invest in? The reason is simple: our research shows that we can outperform the market by imitating the best stock picks from the best hedge funds. Our quarterly newsletter strategy selects 14 small- and large-cap stocks each quarter and has returned 275% since May 2014, beating the benchmark by 150 percentage points. (see more details here).
A senior manager who studies a market index together with a team of young stock analysts.
T-Mobile US, Inc. (NASDAQ:TMUS)
Consensus ROE: 24%
Number of hedge fund investors in the second quarter of 2024: 64
T-Mobile US, Inc. (NASDAQ:TMUS) is one of the three major telecommunications companies in America. As with other carriers, the company’s thesis hinges on its ability to retain and grow subscribers, revenue per subscriber and its presence in the fast-growing fixed wireless market. T-Mobile US, Inc. (NASDAQ:TMUS) also benefits from the fact that since communications services are essential products, its revenues are somewhat hedged against economic downturns. The company has also made big moves lately, becoming the first major U.S. airline to partner with SpaceX to offer customers text messaging via satellite. SpaceX is launching special satellites for this service, and T-Mobile US, Inc. customers. (NASDAQ:TMUS) were relied on to send messages during Hurricanes Helene and Milton that wreaked havoc across the US in October. The company also has the highest free cash flow margin in the industry, as free cash flow grew 54% in the second quarter. During the quarter, the company also added 5.6 million fixed wireless broadband customers.
T-Mobile US, Inc. (NASDAQ:TMUS) is also aggressively targeting the fiber market. Here’s management’s stock on the Q2 2024 earnings call:
“First of all, we’re just really excited about where we are right now. This was a great transaction for us to be able to partner with KKR to acquire Metronet, on top of our previous transaction to acquire Lumos. So now we have the beginnings of a critical mass in space. For me this is big. I mean, these two transactions, along with our wholesale partnerships, will allow us to reach millions of homes. The Lumos transaction will result in 3.5 million homes being completed by 2028. The Metronet transaction will create 6.5 million homes by 2030. There’s probably another couple of million in the wholesale partnerships we have so far.
So that’s a pretty significant footprint that we’ve put together. More importantly, we picked the best assets in the space. We are very enthusiastic about this. As for the premise of your question, I think what people can see from our strategy is a couple of things. Firstly, our preference is pure play fiber, the simplicity and elegance of that model. It’s doing it with partners so we can get more leverage with our equity dollars. It’s about best-in-class assets performing and growing as we see. We still have some appetite, but not much. I want to make that clear. I mean, these transactions that we’ve done have given us millions of homes and are doing it in a way that we think is very smart and positive for our shareholders. So even though we are open to things that fit this strategy, it should still be the right deal.”
In short, TMU is in 12th place on our list of stocks with the highest consensus ROE according to Goldman Sachs. While we recognize the potential of TMUS as an investment, our belief lies in the belief that some AI stocks hold greater promise for delivering higher returns in a shorter time frame. If you’re looking for an AI stock that’s more promising than TMUS but trades at less than five times earnings, check out our report on the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley And Jim Cramer says NVIDIA ‘Has become a wasteland’.
Disclosure: None. This article was originally published on Insider monkey.
