Three stocks strategies heading into Q4 from Goldman
Daniel Balakov
Progress towards a soft landing should help stocks gain over the next year, but trading will be choppy nearer term, according to the Goldman Sachs equity team.
Goldman has year-end S&P 500 (SP500) (NYSEARCA:SPY) (IVV) (VOO) of 4,500 and a 12-month target of 4,700. The index currently sits near 4,500.
"We believe the balance of risks to our year-end price target of 4500 is tilted to the upside," strategist David Kostin wrote in a note. "Despite this constructive medium-term view, the economic growth and inflation data flow could create a choppy path for equities in the next few months."
Goldman highlights three investment recommendations heading into the fourth quarter.
Take advantage of low options prices to reduce risk
"Investors could structure the put spread by buying a 3-month put with a strike 2% below the S&P 500 and selling a 3-month put with a strike 7% below the S&P 500," Kostin said. "The potential max payout of this 5%-wide put spread ranks in the 92nd percentile vs. a 25-year history."
"Alternatively, investors may consider stock replacement via calls to take advantage of low current volatility and position for the likely continued upward trend of US equities next year. Note that while put and call buyers risk their premium paid, put spread buyers only risk their net premium paid."
Own stocks returning cash
"When investors perceive there to be little economic slack late in the cycle, investors are generally skeptical of large plans to invest for growth due to uncertainty about the likely returns on those investments. Instead, in these environments investors usually reward firms returning cash to shareholders."
Goldman's Total Cash Return Basket by Sector
Communications Services (XLC)

Fox (FOXA), trailing 12M yield buyback 9%, dividend 1%, total 10%
Charter Communications (CHTR), 9%, 0%, 9%
Comcast (CMCSA), 6%, 2%, 8%
Omnicom (OMC), 4%, 3%, 7%

Consumer Discretionary (XLY)

Tapestry (TPR), 10%, 3%, 13%
MGM Resorts (MGM), 13%, 0%, 13%
Lowe's (LOW), 9%, 2%, 11%
Autozone (AZO), 10%, 0%, 10%
Bath & Body Works (BBWI), 1%, 1%, 2%

Consumer Staples (XLP)

Constellation Brands (STZ), 8%, 1%, 9%
Altria (MO), 1%, 7%, 8%
General Mills (GIS), 4%, 3%, 7%
Dollar General (DG), 4%, 1%, 5%

Energy (XLE)

Marathon Petroleum (MPC), 26%, 3%, 29%
Marathon Oil (MRO), 14%, 1%, 15%

Financials (XLF)

Synchrony Financial (SYF), 16%, 3%, 19%
M&T (MTB), 11%, 4%, 15%
AIG (AIG), 9%, 2%, 11%
Allstate (ALL), 5%, 3%, 8%
Willis Towers Watson (WTW), 5%, 1%, 6%
S&P Global (SPGI), 4%, 1%, 5%

Healthcare (XLV)

Cardinal Health (CAH), 10%, 3%, 13%
Cigna (CI), 9%, 2%, 11%
McKesson (MCK), 8%, 1%, 9%
Quest Diagnostics (DGX), 7%, 2%, 9%
HC (HCA), 7%, 1%, 8%
Universal Health (UHS), 5%, 1%, 6%
Bristol-Myers (BMY), 2%, 3%, 5%

Avoid companies vulnerable to rising interest expenses
"The long-maturity, fixed-rate debt structures of S&P 500 companies and the ease with which they can tap into capital markets mean these firms are generally insulated from higher rates," Kostin said. "In contrast, floating rate debt accounts for 30% of the debt for Russell 2000 (RTY) (IWV) firms."
"'Higher for longer' interest rates will create pressure on firms with weaker balance sheets, but improving economic growth expectations have outweighed that risk for many stocks YTD."
"For example, a basket of stocks with high floating rate debt has outperformed the equal-weight S&P 500 (RSP) by 3 pp YTD."
Stocks with high leverage and low interest coverage (EBIT/interest expenses):

Western Digital (WDC), net leverage 64x, (2.3)x
Cogent Communications (CCOI), 9x, 0.6x
Bright Horizons (BFAM), 9x, 1.1x
Chemours (CC), 7x. 0.5x
Newell Brands (NWL), 7x. 1.9x
Scotts Miracle-Gro (SMG), 7x, 1.8x
Topgolf Callaway (MODG), 7x. 1.4x
Catalent (CTLT), 7x. 1.4x
Clearway Energy (CWEN), 7x. 0.6x
PENN Entertainment (PENN), 6x, 1.4x
Perrigo (PRGO), 6x. 1.2x
Caesars (CZR), 6x, 1.1x
Aramark (ARMK), 6x. 1.8x
Goodyear Tire (GT), 5x. 1.1x
Lumentum Holdings (LITE), 5x, (2.1)x
ICU Medical (ICUI), 5x. 0.4x
PowerSchool Holdings (PWSC), 5x, 0.5x
Dun & Bradstreet (DNB), 4x, 0.8x
Coherent (COHR), 4x, 0.8x
Avient (AVNT), 4x, 1.2x
Iridium (IRDM), 4x, 1x
Cleveland-Cliffs (CLF), 3x, 1x


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