GOLDMAN SACHS: Buy these 15 cheap, cash-rich stocks in order to dominate the market, even as we barrel towards recession
- Goldman Sachs says companies with strong balance sheets are not only safe investments today, but also unexpectedly cheap.
- Companies with weaker balance sheets outperformed throughout the just-ended bull market thanks to low interest rates, but that's changing abruptly because it looks like a recession is beginning.
- David Kostin, Goldman's chief US equity strategist, has a comprehensive financial metric to find the companies with the best chance of staying afloat as the economy stalls and spending dries up.
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The bull market of the 2010s was a great time to invest in companies with weaker balance sheets. And referring to the unprecedented run in the past tense will take some getting used to.
For much of the 11-year streak, those companies outperformed "safer" companies with stronger balance sheets. Some were very strong growers, while low interest rates helped keep many others alive by offering traditional financial security, such as less debt and more cash on hand.
This chart shows how dramatic that leadership was, and how extreme it grew in recent years - right up until recent months, when views of a slowdown became more prevalent. That's when it started to trend back upward.
The very end of that chart shows that - with a recession a presumed certainty in the months ahead, or possibly underway already - companies with stronger balance sheets now look much more appealing. And with few signs the market turmoil will slow down, and amid clear evidence the economy is headed for a downturn, Kostin and his team think this dynamic will last for a while.
In the meantime, they've identified a universe of stocks that fit the bill. They're the strongest and safest companies in the S&P 500, according to a so-called Altman Z-Score, which evaluates how profitable, liquid, solvent, and leveraged each company is.
The score is based on a series of financial ratios: Working capital to assets, retained earnings to assets, operating income to assets, leverage ratio, and sales to assets.
A higher Altman Z-Score means a company is in better financial position, and experts say a low score of about 1.8 means a company has a high probability of going bankrupt. Kostin says the average company in the S&P 500 has a score of 2.8.
The 15 companies listed below are ranked from lowest to highest based on their Altman Z-Score. This short list of stocks starts with companies whose scores are four times as high as the average S&P 500 company.
Get the latest Goldman Sachs stock price here.
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