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  • Goldman Sachs’ US stock chief says investors should bet on companies investing in themselves.
  • David Kostin says those companies are trading at average valuations but are on track for better growth.
  • He outlines 16 stocks that are making far greater investments in themselves than their peers. 
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According to an old saying, “you have to spend money to make money.” Goldman Sachs says investing in the companies that are spending money is a good way to make money.

Chief US Equity Strategist David Kostin says companies with strong growth in internal investment are outperforming the market, and he calls that a major investment theme for investors looking to say ahead during a choppy-looking period for stocks.

“Companies that in recent years have consistently invested for growth have outperformed the S&P 500 YTD (18% vs. 16%) and are best positioned to continue growing despite the expected slowdown in economic activity,” he wrote in a note to clients.

Kostin says these high-investment stocks are trading at roughly the same valuations as other stocks despite their better performance and superior growth potential. That’s a defensive characteristic that could come in handy, because Kostin thinks stock multiples are more likely to shrink than grow over the next six months.

Kostin and his team looked for the companies that are making worthwhile investments in themselves and calculated what they call a growth investment ratio. They did that by taking the companies’ capital spending, subtracting depreciation, and then dividing the result by cash flow from operations.

The typical growth investment ratio for an S&P 500 company, excluding banks, is 11%. But some companies are set for far greater investments, and in most cases, they also have greater expected profit, sales growth, and returns on invested capital than the broader S&P 500 does.

“Future sales and earnings growth for these stocks should benefit from their multi-year capex and R&D initiatives,” Kostin wrote.

What follows are the 16 S&P 500 stocks with the highest growth investment ratios over the next three years. They’re ranked from lowest to highest, and they all have growth investments of at least 100% over that period. That’s nine times the typical stock on the benchmark index.

While this list cuts off at 100%, there are some other notable names that still rank far above the index average. Twitter, Facebook, Alphabet, Amazon, for example, all have three-year growth investment ratios above 60%.