We recently made a list of Goldman Sachs’ Top Growth Investors: 34 Stocks With The Highest Investment For Growth. In this piece, we will look at where Trimble Inc. (NASDAQ:TRMB) ranks on the list.
With the 2024 US Presidential Election having come to a close, Wall Street can now focus on the future of artificial intelligence, the Federal Reserve’s interest rate cut cycle, and an economy with lower inflation. As was the case during the coronavirus pandemic when historically low interest rates propelled markets to new highs only to come crashing when rates were hiked in 2022, the shifts that are currently taking place should also affect investors for the next couple of years at the very least.
Naturally, this merits a look at what professional analysts are projecting about the future. On this front, investment bank Goldman Sachs recently updated its long-term forecasts for the US stock market. In a research report titled ‘Global Strategy Paper No. 71, the bank outlined that the upgrade is necessary due to market concentration. This ‘concentration’ refers to roaring investor interest in large and mega-cap stocks primarily due to enthusiasm surrounding artificial intelligence.
Since the biggest technology companies are also the heaviest investors in AI, market returns have also focused on them. As an illustration, consider the performance of the flagship S&P index which is up 30.64% over the past twelve months. Now, consider the performances of Wall Street’s top AI GPU stock, the software company behind Windows, the social networking giant that owns Facebook, Jeff Bezos’ eCommerce company, and the world’s leading search engine provider. Their shares have gained roughly 192.21%, 12.66%, 69.01%, 42.44%, and 27.63% over the same period. Consequently, most mega-cap stocks have driven the market in returns.
As per Goldman, this bifurcation implies that the equal-weight flagship S&P index is likely to outperform the market cap-weighted index “by an annualized 200 bp-800 bp” over the next decade, or between 2024 and 2034. To build its argument, the bank cites historical data which also covers the dotcom boom of the late 1990s and the early 2000s. This bubble is key in understanding today’s market, as it does share some characteristics with the surge in artificial intelligence stocks following OpenAI’s release of ChatGPT and Jensen Huang’s prediction of a trillion dollars of compute capacity waiting for an upgrade.
GS points out that the equal-weight S&P tends to underperform the market weight index sharply before the trend reverses. It cites the market’s performance of the two indexes before the bubble’s ‘pop’ to point out that “the trough in 10-year relative underperformance of the equal-weight vs. cap-weight index occurred during the lead-up to the Dot Com bubble (1990-2000).” This saw the equal weight index lag the market weight index by four percentage points (pp) at the trough or the bottom. After the bottom, the differential flipped and the equal weight index led its counterpart by close to seven points (pp). As per Goldman, the four-point shortfall “has been matched during the past decade (2014-2024E) as the aggregate index has been powered by a few mega-cap Tech stocks and AI euphoria.”
Linking historical performance trends with investor concentration in mega caps and AI stocks, the bank shares that this “extreme level of market concentration (99th percentile) suggests the magnitude of equal-weight outperformance over the next decade should also be stronger than average.” Just how strong can this be? Well GS outlines that the equal weight index can outperform the market weighed index by 8 percentage points. On the flip side, since this is the most bullish forecast, the bank notes that if equal weight index performance reverts to its historical mean over the past 50 years, then “this would imply a less dramatic 2 pp of annualized outperformance.”
While stock market math is all good, other factors also drive its performance. November has seen headlines talk about nothing else but the Presidential Election. Post-election stock performance saw some firms, like Elon Musk’s car company record stunning gains. Goldman’s Shawn Tuteja, who works with exchange-traded funds (ETFs) and baskets, shared some insights about what sectors performed well after the election and whether this outperformance will continue. In a podcast, he outlined that “the biggest themes that we saw play out the day after the election on Wednesday were regional banks and banks getting bought.” He shared that “any sectors that were linked to de-regulation, benefited.” These include “energy, traditional energy versus renewables” with the former up by 4% while the latter losing roughly 10%.
Tuteja added that “the resilience and strength of US tech over the past couple of days post the election” was a standout from the market’s post-election performance in 2016. As to what lies in the future, the Goldman analyst is optimistic. He believes that “what I would expect to come over the next couple of weeks is a continuation on the factor level of the themes that worked post the election.” This is because “it takes time for money to be deployed and for themes to play out.” According to him, in 2016, “regional banks and big banks rallied for months after the election and they outperformed all of the other sectors in the market.” Additionally, while the broader markets might have calmed at a surface level, Tuteja points out that “under the surface, those sector moves become a lot more violent as correlations in the market break, as people start picking winners and losers in the new government regime’s policies.”
For some bank stocks, you can check out 10 Best Local Bank Stocks To Invest In Now and 10 Best Diversified Bank Stocks to Buy Now.
Within this dynamic environment that will see the Fed continue to tailor its interest rate decisions to the economy and companies adjust to a looser monetary policy, firms might also increase their cash spending. In a note covering spending, Goldman shared that the benchmark S&P index firms can increase their spending to 11% next year from 2024’s 8%. This will be driven by rising profits, as the bank believes that earnings “growth alone can explain 40% of next quarter’s cash spending growth.”
Just like it expects equities performance to broaden in the future, the bank also posits that the “typical stock should close the earnings growth gap with the mega-cap tech stocks.” Finally, on the topic of mergers and acquisitions, which slowed down in the wake of historic interest rates, GS is optimistic. It expects “cash M&A will rebound by 20% in 2025,” but cautions that “the potential for tariffs, regulatory changes, and corporate tax reform could meaningfully shift these forecasts.”
Our Methodology
To make our list of Goldman Sachs’ top growth investment stocks, we used the bank’s recent list of stocks and picked out those with a growth investment ratio of 70% or higher. This ratio is defined as the ratio of capital expenditure and R&D spending excluding depreciation over a firm’s cash flow from operations.
For these stocks, we also mentioned the number of hedge fund investors. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A worker at a remote location using Automated Application Technology with their tablet and scanner.
Trimble Inc. (NASDAQ:TRMB)
Growth Investment Ratio: 80%
Number of Hedge Fund Holders: 41
Trimble Inc. (NASDAQ:TRMB) is a hardware and software firm that serves the needs of the construction, mapping, and other industries. Since it primarily offers positioning products and services, the firm’s fate is dependent on the economy since it determines the performance of industries such as shipping. Trimble Inc. (NASDAQ:TRMB) benefits from the fact that most of its revenue is from margin-heavy subscription services. During the first three months of 2024, 63% of Trimble Inc. (NASDAQ:TRMB)’s revenue came from its subscription business. The firm’s third-quarter results also hinted at the potential pent-up momentum in the stock. Prior to the report, Trimble Inc. (NASDAQ:TRMB)’s shares had marked a modest 17.5% year-to-date gains. After the earnings, the stock shot up by 17.9% as the company’s subscription revenue grew by 10.7% to sit at $568 million. The revenue growth hinted at a recovery in Trimble Inc. (NASDAQ:TRMB)’s key markets of agriculture and transportation in the wake of interest rate cuts by the Federal Reserve.
Meridian Funds mentioned Trimble Inc. (NASDAQ:TRMB) in its Q2 2024 investor letter. Here is what the fund said:
“Trimble Inc. (NASDAQ:TRMB) is a leading industrial technology company that provides hardware, software, and services primarily to the construction, geospatial, transportation, and agricultural industries. Over the last several years, Trimble has been transitioning toward a subscription-based, recurring revenue model. The stock fell in the quarter when its 10K filing was delayed due to an audit that called for additional documentation of internal controls. We don’t view the issue as material and the delay detracted from what otherwise was a very good quarter for its business and maintained our position in the company during the period.”
Overall, TRMB ranks 29th on our list of Goldman Sachs’ top growth investors. While we acknowledge the potential of TRMB as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than TRMB but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
