- Investors panicked as stocks plummeted to their record 2022 lows last week.
- Goldman Sachs’ David Kostin said investors should buy assets that perform well in bear markets.
- This means stocks with high liquidity and cash that are trading below previous recessionary lows.
Heading into 2022, Goldman Sachs predicted that the S&P 500 would cross the 5,100 threshold by the year’s end. But after a recent revision, the bank’s year-end price target now sits at 4,300, said David Kostin, Goldman Sachs’ chief US equity strategist, in a recent research note.
In dire straits like these, it’s easy for the market to panic. But according to Kostin, it’s important now more than ever for investors to consider protecting their portfolios by adding in stocks with a proven track record of safety and security.
Identifying safe-haven stocks
Kostin and team examined stocks’ safe-haven track records by observing three factors: size and liquidity, strength of balance sheet, and valuation attractiveness. He identified 20 specific stocks that met all three criteria, discovering that these stocks have on aggregate outperformed the S&P 500 since mid-2021 despite trading at both cheap absolute and relative valuations.
In his analysis, Kostin only considered stocks with a market capitalization above $10 billion.
“In uncertain times, investors seek
, which in practical terms means an above-average
,” he wrote. The median capitalization of the group of 20 stocks was $36 billion, versus the S&P 500’s $29 billion.
Kostin also only selected for firms with a stronger balance sheet scoring than the S&P 500’s median. That’s because during times of economic downturn, it’s advantageous for firms to hold more cash.
“Companies with strong balance sheets are typically less sensitive to an economic slowdown because they are better positioned to withstand a decline in credit market liquidity. At a factor level, strong balance sheet has historically outperformed when financial conditions tighten and growth slow,” Kostin explained. To score each firm’s balance sheet, he examined metrics like working capital, earnings, market capitalization, and sales versus overall assets.
Finally, Kostin rated each stock for its valuation attractiveness by comparing its current versus historical valuations in March 2009 and March 2020, two former recessionary troughs. Kostin adjusted current valuations by reducing forward earnings per shares (EPS) estimates to account for the downward corrections he anticipates analysts will make later this year.
“We screen for stocks with a ‘margin of safety,’ meaning the valuation today assuming EPS estimates for next year are reduced by 20% would still be attractive compared with how the shares were valued during previous bear markets,” he explained, specifically comparing current versus historical price-to-earnings ratios, earnings yield, and income growth.
The current median price-to-earnings (P/E) ratio of the 20 stocks on Kostin’s list is 12x, below the group’s median forward ratio of 14x in 2009 and 13x in 2020. By comparison, the S&P 500 currently trades at a P/E ratio of 20x. The 20 names are also more attractive today when measuring their adjusted earnings yield gap against the yield from the ten-year US Treasury.
Even after a 20% EPS reduction, Kostin’s stocks have a median positive 4% EPS growth rate, versus the S&P 500’s median -2% growth rate. Additionally, at 2.1%, the annualized
of all 20 stocks is still greater than the S&P 500’s 1.6% for a typical stock.
Below are the 20 companies that Kostin identified with a proven track record of liquidity, strength, and safety that are still trading at attractive valuations compared to their previous
levels. Besides its ticker, sector, and market capitalization, each stock is also listed with its forward P/E ratios from 2009 and 2020 versus its current price-adjusted P/E ratio.