Six shares for market-beating returns in 2016

More beavering away at Goldman Sachs HQ has generated another six shares tipped to generate alpha - returns that beat the benchmark index - in 2016. The ideas, based on the investment themes of either European recovery, technology disruption or the "New Oil Order", have thrown up four 'buy' recommendations and two 'sells'.

France recorded its highest temporary staffing volume growth since 2011 in October, road traffic growth in Italy this third quarter was the strongest since the beginning of 2007, and electricity demand is up two percentage points in Spain.

"Our economists forecast acceleration in Euro-area growth from 1.5% in 2015 to 1.7% in 2016 supported by lower oil prices, a weaker euro, improved credit conditions, and easier fiscal policy," says Goldman.

With exposure to improving domestic activity and use of bolt-on acquisitions to drive growth, Dutch HR consultant Randstad and French rental company Europcar are added to the broker's DOR (directors of research) Focus List.

But luxury retailer Luxottica may not have what it takes to maintain outperformance this year, and Goldman reckons the risk posed by ecommerce is "underappreciated".

In the UK, Goldman has three top tips for outperformance in 2016.

Hastings (BUY)

The market is so far ignoring Hastings' exposure to "superior" growth and returns, optimised through its use of price comparison websites. Hastings is the sixth-largest motor insurer in the UK according to gross premiums, thanks to its growth strategy in the US - rapid growth with a defined loss ratio - and its trading platform Admiral.

Valued at £1.1 billion (170p per share), Hastings only listed in London a month ago. Maiden results showed it's benefitting from a low-cost business model, data driven underwriting approach and strong counter-fraud/claims liabilities, says Goldman Sachs.

Despite it short history as a quoted company, Hastings has underperformed UK peers by an "unwarranted" 9%. At 173p, the shares trade on 10.6 times 2016 earnings estimates versus 15 times for the sector.

To generate strong earnings and dividend growth, the company will need to increase policy count to 2.5 million by 2017, says Goldman, as well as achieve a loss target of 75-79% and become synonymous with reserve stability. Reducing its leverage multiple below 1.5 times by the end of 2017 and achieving a pay-out ratio between 50-60% will help, too.

Initiating coverage with a 'buy' rating, analyst Ravi Tanna pencils in 2016-19 earnings per share (EPS) and dividend per share (DPS) compound annual growth rates (CAGRs) of 24% and 29% respectively. "Hastings' 2016/17E dividend yield of 5.3%/7.0% also provides valuation support."

Hunting (BUY)

Predicting the plummeting oil rig count will bottom out at early in 2016, Goldman reckons Hunting will benefit from any recovery in onshore drilling activity driven by new budget cycles, and given its exposure to US shale.

With low oil prices the new normal, the industry is trying to navigate a return to profitable growth. With positive free cash flow and a strong balance sheet, Goldman reckons Hunting shares are worth 70% more at 560p, although this price target has been trimmed due to current market conditions.

"While consensus numbers look too high, we believe that the company can be cash generative even in another down year for activity in 2016, leaving it in a robust position to take advantage of the sharp recovery in activity we expect in 2017," says Goldman.

It admits its promotion of Hunting to its Conviction List hasn't been without criticism, with some investors questioning the group's balance sheet and ability to survive a longer-than-expected downturn.

The alternative play on potential US recovery is through Tenaris, it says, which has a strong net cash position and a strategy to but a distribution network.

SSE (SELL)

But it's not all rosy for UK stocks. Increased gas supply and lower customer volumes could threaten the 2018 dividend and Goldman has placed SSE on its Conviction Sell List - although this divides opinion, too. Weaker power and gas prices would make it increasingly likely.

"We do not expect any offset to commodity price weakness from SSE's supply activities. SSE already has the lowest cost to serve of the "Big Six" suppliers (limiting cost-control potential) and is losing customers (customer numbers were down more than 2% at 1H16)," warns Goldman.

"Further pressure on margins could come from the CMA's [Competition and Markets Authority] recommendations for reforms of the UK supply market (provisional decision due in January)."

The investment bank reckons earnings per share will fall 14% from 2015-2016, as lower commodity prices wipe out growth in its regulated networks and new renewable capacity.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.