Goldman Sachs' 'conviction list' shows key stock picks

Goldman Sachs out with its conviction list with three key areas in focus this fall. Artificial intelligence, the state of the consumer and sustainability. Joining us in studio to break down the findings from the report, we've got Steve Crum, the Director of America's Equity Research over at Goldman Sachs. Steve, it's great to have you on to discuss this. So I know you guys call it the director's cut of Goldman stocks from your conviction list. Just give our audience the so what factor for this list in 30 seconds or so. First of all, thanks for having me. It's great to be here. So conviction list director's cut is really meant to be a curated list of our top by rated fundamental stock calls coming out of the research department. To take a step back for your viewers, we have roughly 1200 stocks under coverage in the Americas. At any given time, five to 600 of those stocks might be rated by. So what we heard from investors is it would be great to have a list to help us distill down to what you think is most differentiated, where your analysts have the highest level of conviction. What we look for is high conviction, good risk adjusted returns, and point of differentiation in the marketplace. And the feedback has been fantastic since we introduced this list last June. So Steve, let's talk about some of the changes to this list. As we were going through it, there's a number of names that we want to get into. But let's start with the fact that you guys added Pinterest to this list. And then at the same time, you removed Amazon and you removed Guidewire. Walk us through that thesis and why there's so much optimism surrounding Pinterest. Yeah, so it's important to think about, we don't think of these as swaps or anything like that. We're keeping this list 20 to 25 names. And the idea and the discipline around this list is to ensure that we're keeping the list fresh. So in the case of Pinterest, Eric Sheridan, who's our analyst that covers Pinterest, has very high conviction on their ability to monetize their user base. And he speaks in his research about the various levers that they're going to pull. And he's starting to see that trend develop. All the while, he sees a lot of margin expansion over the next five years. He has 200 to 300 basis points baked into his projections of margin expansion per year in each of the next five years, which leads his earnings to be 6% above the street in 2025. And when we think about fundamental bottom-up research, we're trying to project the E and where we can find the differentiation. And all the while, on his risk return framework, he sees three to one upside downside on a name like Pinterest. You asked about the removal, so I'll just briefly touch on it. Look, we're trying to keep this list fresh and keep it disciplined. Amazon is still a top pick for him. It's one of his favorite names, Eric Sheridan, that is. It had been on the list since our inception back in June of last year. So as part of the discipline to continue to keep things fresh for our investor base, we decided to remove that. And Guidewire, both Amazon and Guidewire have been fantastic stocks. So it's not necessarily that he's changed his view at all, just in terms of the degree of bullishness, but really it's just a rejiggering as a name that maybe better fits into your vision, Goldman's vision here. Correct. And I should say, unlike many other lists that you see out in the marketplace, these ideas on this list are sourced from the fundamental work, the good fundamental work that our analysts do. And the names are selected by a subcommittee of our internal investment review committee. We spent a lot of time on investment process and spent a lot of time with our analysts talking about stock recommendations. And so these are sourced from them. But yes, their views have not changed. They're bi-rated. It makes me think about it too. I was able to speak with Toshi Yahari, who is the analyst behind NVIDIA, about his call on the stock, obviously a bi-rating, you call it the shovel of the AI gold rush. And he said the sell-off that we saw on NVIDIA following their earnings was completely overdone. What is the bull case for NVIDIA now, especially as we are getting closer to their next quarterly earnings break? Sure. And we just had Jensen speaking at our Communicopia conference a couple of weeks back. Look, NVIDIA has been on this list for about a year now. And you may say, you said differentiated ideas. How could you be differentiated on NVIDIA? Would be a natural question. For the better part of the past year, Toshi's earnings estimates have been 20% above the street. And all you've seen is upward revision. So there's differentiation in that without even the need for multiple expansion. And I think, and we think, as the AI infrastructure development continues to play out, NVIDIA is right in the sweet spot of that. So he's still about 6-7% above the street on earnings, and we expect revisions to be higher. Not having NVIDIA on a list like this, I think, would be a bit of a surprise for investors, just given the massive growth and everything that we're expecting to see going forward. See, let's switch gears here because we're short for time, and I want to talk financials. And one of the names within the financials that you guys like that's on this list is Citigroup. We're about to hear from the bank here in just a few days as we kick off third quarter earnings season. What is it about Citi that Goldman views as the differentiating factor, especially when you compare it to some of those other larger big banks? Yeah, so the analyst there, Richard Ramsden, has been out with a call where he thinks that Citi is able to drive top line, all the while with cost control measures that they have in place, to drive margin expansion better than others that he covers, which is important in that it's leading to a return on tangible equity north of 10%. I think he's at 10.2%, which is driving the cash flow that he thinks they could start returning to shareholders in a bigger way. Is that indicative of Jane Fraser's kind of defensive work on the balance sheet since she started doing a lot of cost cutting, in particular with regards to labor at the company? Yeah, I'll leave that to Richard, but yes, it would seem as though the way he's modeling this out is a combination of both the ability to drive top line while also controlling costs. Steve, when you took us back from this list and Mattie started the conversation talking about some of the themes with sustainability, the AI, and the consumer, what do you think that tells us just about where we are in the economic cycle and factoring in the equity side of things, just where we really see that growth year going forward as we talk about that next leg higher? So I heard you guys reference earlier chief economist Jan Hatzias lowering his recession probability to 15%. He's been above consensus for GDP growth in the U.S. in particular and been right with that call. And also our portfolio strategists on Friday raised their earnings expectations from a top-down standpoint to 11% growth next year. You know, we're about sort of the bottoms-up and you mentioned themes. We don't manage this list, top-down themes, but what's interesting is the discovery that you get when talking to analysts because the themes certainly play a role in their fundamental bottoms-up stock picking. And I think what it's telling us right now, interesting to one of your prior guests, is that there is a broadening out of the market. That's the expectation that we have. And organically, we have a lot more mid-cap names on this list than we had six months ago. Roughly half our list, you can say, is in that mid-cap sweet spot. So I think that that is certainly a theme in the marketplace. You mentioned the consumer. We as a house, both our macro team and our bottoms-up research fundamental analysts have been above consensus on their expectation from consumer spending and they expect that to continue going forward.