3 Must-Watch Stocks After a Bullish Goldman Sachs Recommendation

Key Points

• After recent market volatility, a Goldman Sachs analyst stepped up to give investors confidence about which stocks to look for. 
• Three stand out in this criteria as they have strong and predictable cash flows, which lead to dividends and buybacks. 
• Wall Street analysts agree these stocks have more upsides, backed by attractive EPS growth.

Investors are shaken up after last week's volatility in the stock market, which rocked indexes from Tokyo to New York. This left all participants with the concern that more could be coming in the following weeks. Knowing that there is a confidence gap to be filled for those who rely on professional advice and information, some banks have stepped forward to help out.

Today, Goldman Sachs Group Inc. NYSE: GS analysts shed some light on the potential selection criteria that could help investors navigate today's and tomorrow's marketplace. Analyst Peter Oppenheimer wrote that the bank is still in defensive mode as markets face election and geopolitical volatility, so the call is for quality growth companies with stable cash flows. It looks like value stocks with a strong dividend and buyback program could fit the description.

There weren't any specific stocks in this recommendation list. Still, the descriptions were enough for some investors to justify adding Realty Income Co. NYSE: O through steady real estate investment trust (REIT) dividends and predictable cash flows. Additionally, PepsiCo Inc. NASDAQ: PEP operates in the consumer staples sector and also fits the profile. Last but not least, investors could consider the insurer American International Group Inc. NYSE: AIG.

Realty Income Stock's Stability Delivers the Complete Goldman Package

Investing in REITs offers investors several benefits, the main one being dividend payouts. In the case of Realty Income, there is a $3.15 share payout per year, which translates to a 5.2% dividend yield that beats not only inflation but also the ‘risk-free’ yield offered by U.S. 10-year bonds.

Not to mention, this dividend is paid out on a monthly—not a quarterly—basis. According to the company’s investor presentation, dividend payouts have been running for up to 29 consecutive years, growing at 4.3% per year on average. It’s like getting a raise without doing any extra work.

So, with a focus on predictable cash flows, real estate doesn’t get much better than that. Realty Income’s tenants include businesses like CVS Health Co. NYSE: CVS and Walmart Inc. NYSE: WMT, creating confidence for the company that rent will be paid and probably on time.

This is why analysts at Tigress Financial have placed an $86 price target on Realty Income stock, daring it to rally by as much as 25.5% from where it trades today. That sets the pace for Goldman’s filtering process, income with upside so far.

PepsiCo Stock: Steady Demand Drives Both Income and Upside Potential

People think PepsiCo is essentially about soda products, but that’s not even half the story. This company has a snack segment that offers anything from chips to popcorn. They are also exposed to water products. The trend is definitely focused on consumer staples products that have strong and predictable demand.

Fitting the profile, Wall Street analysts forecast up to 7.5% earnings per share (EPS) growth in PepsiCo stock for the next 12 months, above its main competitor, Coca-Cola Co. NYSE: KO 's forecast of only 5.9% for the year. Noticing the greater growth potential and stability in PepsiCo, price targets were also raised along with this view.

Those at Barclays decided that PepsiCo stock is worth closer to $187 a share, which directly calls for up to 8.4% upside from where it trades today. More than that, the company offers a $5.42 payout per share, which translates into an annual dividend yield of 3.14%.

While this income is lower than Realty Income's, investors make the trade-off through upside. Even bearish traders have realized the upside that could be coming to PepsiCo stock, which is why the company’s short interest has declined by 10.6% in the past month, a sign of bearish capitulation.

American International Group Stock: Unlocking Ultimate Upside in Its Resilient Business Model

The nice thing about an insurance company is that it is the closest thing to being a real estate landlord. The income typically comes not through rent but through monthly premiums. Having a team of mathematicians calculate payout risk also allows the company to reinvest and create a return on the capital held within the company.

Warren Buffett realized the potential compounding effects of this business model, which is why he sought to invest in insurance companies for their 'float' in his early days. That is also why American International Group stock carries the highest upside in this list.

Analysts at J.P. Morgan Chase & Co. believe this insurer is worth $93 a share, which offers a net upside of 29.1% compared to today's prices. To top off the characteristics of this stock within Goldman's recommendation, Wall Street predicts up to 15.2% EPS growth for the next 12 months.

Speaking of further upside in the stock, management reiterated that prices could be higher. After an upbeat second quarter 2024 earnings result, management approved a $10 billion buyback program, up to 21.5% of the company's market capitalization.