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Goldman Sachs recommends investors buy 'quality at a reasonable price.' Here are the firm's top 10 stock picks that fit the bill.

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  • 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 herePress Release Distribution

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