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The One Useful Thing Goldman Said Today

By Alex Dumortier, CFA - Apr 24, 2013 at 7:00PM

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Mapping the market for value

Following two days of gains, U.S. stocks ended flat on Wednesday, with the S&P 500 (^GSPC 2.19%) up just a hundredth of a point. The narrower, price-weighted Dow Jones Industrial Average (^DJI 1.80%) fell 0.3%.

Meanwhile, the VIX (^VIX -3.49%), Wall Street's fear gauge, rose 1% to close at 13.61. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)

Goldman's market map
Goldman Sachs
' perma-bull-in-chief, Abby Joseph Cohen, was on CNBC this afternoon to tout the firm's view on stocks. You won't be surprised to learn she's bullish on equities. (As former Goldman partner once told a trainee: "In the securities business, there's only one way to be -- and that's bullish! Always bullish!") She also favors equities over bonds; again, this can be no surprise to anyone who has watched yields shrink to microscopic levels in the post-crisis era.

Last month, on March 18, Goldman raised its end-of-year target for the S&P 500 by 3.2% to 1,625 from 1,575. The bank justified the revision in part on a $1 increase in his 2013 earnings-per-share estimate for the index to $108. The latter estimate remains below the S&P Dow Jones Indices' bottom-up and top-down earnings estimates -- but those estimates look frothy to me, at $109.52 and $111.98, ("Bottom-up" estimates are obtained by aggregating the estimates of all the companies in the S&P 500; "top-down" estimates are the product of macro-level analysis.)

However, I suspect the catalyst for the upward revision was less fundamental than technical, as the S&P 500, on the back of a robust first-quarter rally, was already within 1% of Goldman's previous target. Wall Street strategists are professionally averse to defending price targets that are below the current level, as they imply -- horror of all horrors -- that they expect prices to fall.

Still, Cohen did have something rather more useful to say:

The thing that we would be looking at is not high-yielding securities, but, rather, those companies that can grow their dividend. History shows that it's the higher-yielding securities that basically don't have much else to do with their capital. Investors tend to be better off when they combine two things: return on invested capital and growth in dividends. That is good cash flow, not all of it going to the dividend, a good portion of it going to future growth of the company, including that long-term investment in R&D that I mentioned a few moments ago. That's a real sweet spot right there.

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