Goldman Sachs recommends investors buy 'quality at a reasonable price.' Here are the firm's top 10 stock picks that fit the bill.
- As states across the US consider timelines for reopening businesses, Goldman Sachs says investors should put money to work in stocks with strong balance sheets.
- "Companies with the strongest balance sheets are in the best position to weather the cash flow shock resulting from the economic shutdown," the bank's equity strategists wrote in a client note.
- They recommend investing in names that fit the description of "quality at a reasonable price," and have compiled a list of stocks including some technology giants like Alphabet and Facebook.
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For weeks, Wall Street analysts and investment strategists have told investors that snapping up stocks with strong balance sheets would be a wise strategy to deploy while the coronavirus pandemic wreaks havoc on the market.
Companies with solid cash flow and little debt are thought to be most fundamentally sound, since they could survive — at least temporarily — a sudden drought in business like the one so many have seen this spring.
In a new report, Goldman Sachs strategists are taking that thinking to the next level, recommending a list of high-quality, cash-rich names to buy as the US government starts to consider a timeline for reopening the economy.
"Companies with the strongest balance sheets are in the best position to weather the cash flow shock resulting from the economic shutdown," the bank's equity strategists led by Arjun Menon wrote in a report to clients.
The strategy, which they refer to as buying "quality at a reasonable price," is part of a wider three-part investment method Goldman Sachs detailed in a recent note around how to capitalize on the gradual business normalization, Business Insider previously reported.
To that end, the strategists pointed out that its "strong balance sheet" basket of stocks has fallen just 4%, outperforming its "weak balance sheet" basket, which has dropped 25%.
"With rising risks of defaults and downgrades, investors will likely continue to assign a premium to companies with the lowest balance sheet liquidity risk," they wrote.
For their new list of 30 stocks, Goldman considered two key areas: quality of a stock defined by balance sheet strength (in other words, a low risk of default as defined by Altman's Z-Score) and the stock's price-earnings ratio.
Altman's Z-Score is a metric that considers key metrics to assess the likelihood of default: "working capital/assets, retained earnings/assets, EBIT/assets, market capitalization/liabilities, and sales/assets," in Goldman's definition.
Key risks to their strategy include a "faster-than-expected economic restart, significant progress on virus treatments, and a milder economic shock than is currently priced."
Here are the first 10 stocks the firm recommended, listed in order of lowest Z-Score to highest. The Altman Z-Scores and market capitalizations listed are sourced from Goldman's analysis published April 26.
10. Alphabet
Ticker: GOOGL
Sector: Communication services
Market cap: $762 billion
Altman's Z-Score: 9.1
Source: Goldman Sachs
9. Garmin
Ticker: GRMN
Sector: Consumer discretionary
Market cap: $15 billion
Altman's Z-Score: 9.4
Source: Goldman Sachs
8. Mastercard
Ticker: MA
Sector: Information techology
Market cap: $255 billion
Altman's Z-Score: 11.2
Source: Goldman Sachs
7. Facebook
Ticker: FB
Sector: Communication services
Market cap: $446 billion
Altman's Z-Score: 11.8
Source: Goldman Sachs
6. Texas Instruments
Ticker: TXN
Sector: Information technology
Market cap: $103 billion
Altman's Z-Score: 12.1
Source: Goldman Sachs
5. Arista Networks
Ticker: ANET
Sector: Information technology
Market cap: $16 billion
Altman's Z-Score: 12.2
Source: Goldman Sachs
4. Regeneron Pharmaceuticals
Ticker: REGN
Sector: Healthcare
Market cap: $61
Altman's Z-Score: 12.7
Source: Goldman Sachs
3. IPG Photonics
Ticker: IPGP
Sector: Information technology
Market cap: $6 billion
Altman's Z-Score: 13
Source: Goldman Sachs
2. Skyworks Solutions
Ticker: SWKS
Sector: Information technology
Market cap: $16 billion
Altman's Z-Score: 15.8
Source: Goldman Sachs
1. Monster Beverage
Ticker: MNST
Sector: Consumer staples
Market cap: $32 billion
Altman's Z-Score: 22.7
Source: Goldman Sachs
* This article was originally published here
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