The Federal Reserve may be nearing the end of its campaign of raising interest rates, suggesting that investors should think about investing in stocks with high growth prospects, such as Churchill Downs (NASDAQ: CHDN) and Las Vegas Sands (NYSE: LVS). This is based on a recent report by Goldman Sachs equity strategist David Kostin. Kostin screened the Russell 3000 Index, looking for companies with a market value in excess of $1 billion and annual sales of at least $100 million (excluding biotechnology, energy, financial services and real estate organizations), that demonstrate strong growth margins.
The aim of this endeavor was to discover stocks that could prosper if rates fall and the economy improves, as well as those that could be durable in a potential recession. Kostin noted other advantages of investing in high-margin growth names.
“While the past indicates a potential upside risk to our prediction for a flat equity market, we think that S&P 500 valuations and earnings face specific headwinds in 2023 that will stop near-term returns from being as strong as usual at the end of past tightening cycles,” said the Goldman Sachs strategist.
Churchill Downs and Las Vegas Sands were two of the three consumer cyclical stocks highlighted by the bank on its list. Sands’ inclusion makes sense since its shares are not closely linked to interest rates, and the operator’s entire portfolio of six properties is situated outside the US. This could make the stock somewhat resilient to a domestic recession. Additionally, it’s likely that Sands made a profit in Macau in the first quarter, or at least reduced its EBITDA losses there.
If the Fed moves to lower interest rates, this would benefit LVS if it needs to borrow money for enhancements at its Macau properties and Marina Bay Sands, or for domestic projects, such as its New York casino bid. Furthermore, stocks in general often increase following the end of a monetary tightening cycle.
Churchill Downs’ listing on the Goldman Sachs high-margin growth list coincides with the Kentucky Derby, the company’s flagship event at its Kentucky track. With a 12-month sales growth consensus estimate of 15% and a margin growth estimate of 19% for the same period, Churchill Downs meets the criteria of a high-margin/high-growth stock. Additionally, upgrades to its track and a partnership with FanDuel are among the catalysts for Churchill’s stock, according to Macquarie analyst Chad Beynon.
Given its iconic status, pricing power and upgraded facilities, Beynon believes that Churchill Downs should be given a premium valuation multiple even compared to other comparable global luxury and unique brands. All of this suggests that investors should consider Churchill Downs and Las Vegas Sands when considering stocks with high growth potential as the Federal Reserve nears the end of its interest rate-hiking campaign.
