GOLDMAN SACHS: Here's how to make a killing in a market that's barely moving
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- Goldman Sachs recommends investors look for stocks with high Sharpe ratios in a historically low-volatility environment.
- The Sharpe ratio is calculated by dividing a stock's future price target by its 6-month implied volatility.
- The firm maintains a proprietary basket of high-Sharpe-ratio stocks, which is tilted at the industry level towards semiconductors, pharma and biotech, capital goods and insurance.
Sometimes, when the market isn't moving enough to whip up returns, you have to take matters into your own hands.
That's the crux of a recent recommendation made by Goldman Sachs, which has been strategizing ways to profit from a stock market that's been stuck at a standstill for most of 2017, with the CBOE Volatility Index - or VIX - sitting close to the lowest levels on record.
The key, according to Goldman, is to identify companies with high Sharpe ratios - a measure calculated by dividing a stock's future price target by its 6-month implied volatility. In doing so, traders are then presented with stocks set to provide the best risk-adjusted return on investment. These types of companies tend to outperform in a low-volatility environment, says the firm.
And luckily, Goldman has constructed a basket of stocks with lofty Sharpe ratios, which it says is a much better bet than simply making trades set to profit from subdued price swings. The firm notes that when six-month realized volatility has been less than 12, its proprietary index has beaten a minimum-volatility strategy 73% of the time since 1999.
Goldman Sachs
As of right now, Goldman's newly rebalanced 39-company basket is tilted at the industry level towards semiconductors, pharma and biotech, capital goods and insurance. The firm says that, relative to the median S&P 500 stock, its basket offers triple the expected return, at a similar level of expected volatility.
Here's a sampling of the companies located within Goldman's index:
- Consumer discretionary - DISH Network, Expedia
- Consumer staples - Molson Coors, CVS Health
- Energy - Range Resources, EQT
- Financials - Assurant, XL Group
- Healthcare - Alexion Pharmaceuticals, Incyte
- Industrials - General Dynamics, General Electric
- Tech - Western Digital, Xerox
- Materials - Ball Corp., Newmont Mining
Get the latest Goldman Sachs stock price here.
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