When the going gets tough, the cream rises to the top.
This has been said of all aspects of life, and Goldman Sachs says it unequivocally applies to the stock market as it stands right now.
And some reassurance is surely needed at the moment as firms across Wall Street warn of an impending economic slowdown and evaporating stock market returns as soon as next year.
Fear not, says Goldman, which has a strategy tailor-made for such conditions: Buy high-quality companies early and often.
While buying shares of good companies may seem glaringly obvious, it hasn’t actually been the most effective strategy through much of the nearly 10-year bull market. During the prolonged stretch in which interest rates were near zero — which allowed even companies with the weakest balance sheets to tap capital markets — low-quality firms were actually the more enticing prospect.
Now that interest rates are rising, siphoning off the easy supply of capital so many companies used to their advantage, quality is back in vogue. This is especially true since economic growth is also expected to slow, and the market as a whole will be at increased risk of sudden shocks, Goldman says.
With that established, what actually qualifies as a high-quality company? Goldman narrows it down to five key factors: strong balance sheets, stable sales growth, low deviation in operating income, low stock drawdown risk, and return-on-equity that exceeds peers’.
Goldman combines these into a so-called quality score. Here are the 18 stocks screened by the firm that have the highest ratings. Goldman’s scale goes from zero to 100, and the firms are listed in increasing order of quality.
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