Goldman ‘margin of safety’ portfolio shows stocks too cheap to ignore
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Goldman Sachs recommends “margins of safety”, stocks it believes are too affordable to ignore, as investors struggle in the financial market. The Federal Reserve’s rate-hiking cycle, persistent inflation and recession risk have all contributed to the U.S. stock market being under pressure. The S & P 500 is down more than 16% this year. In a Monday note, David Kostin, chief equity strategist at Goldman, stated that the US equity market was ravaged by several macroeconomic headwinds. Given the environment, Goldman recommends a “margin of safety” approach to clients — a classic value investing strategy popularized by the likes of Warren Buffett and Seth Klarman. The “marginof safety” principle is generally used to describe stocks with a market price that is substantially lower than their real value. Buffett, an investor, looks for shares at a price that is so low the trade can work even though earnings may not pan out as expected in an uncertain economy. Others define margin of safety as firms with large gross margins, which make them more resilient and defensive in times when the economy is slowing or entering a recession. To identify stocks with defensive qualities and a solid margin of safety, Goldman screened the S & P 500 for companies with three key characteristics: size and liquidity, balance sheet strength and attractive valuation. Goldman selected stocks with market caps above $10 billion using an above-average equity capitalization proxy for liquidity. Then it looked for stocks with strong balance sheets, using the Altman Z-score, a grading tool developed to forecast bankruptcies. It measures five financial ratios — capital to assets, retained earnings to assets, operating income to assets, leverage ratio and sales to assets. The Goldman analysts also identified stocks with a “marginof safety” at current valuations. Goldman chose stocks that had attractive valuations compared to bear markets. This is even after the earnings-per-share forecasts for 2023 were reduced by 20%. The median “margin of safety stock” has outperformed the S & P 500 this year, according to Goldman. An equal-weighted basket of these shares has also beaten the equal-weighted S & P 500 since mid-2021, the firm said. Check out the ten stocks featured on Goldman’s list. This list includes energy stocks, which are at the top of the market, rising nearly 50% in the group by 2022. As global economic activity recovers after the Covid lockdowns and sanctions against Russia, energy companies have been able to benefit from higher oil and gas prices. Goldman lists several energy stocks such as Exxon Mobil (Chevron), Devon Energy, and Exxon Mobil. Goldman lists several semiconductor companies. Goldman noted that Micron Technology and Qualcomm are both chip names which offer a high degree of safety. More typical defensive stocks — consumer staples and health care — on the list include Tyson Foods and Vertex Pharmaceuticals . — CNBC’s Michael Bloom contributed to this report.
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