Goldman says investors need a new recession playbook, recommends these stable stocks
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When the economy goes into recession, stocks with strong balance sheets usually beat the market. But Goldman Sachs suggested that this may not be true. Instead, the firm recommended investors own stable stocks — as well as companies with excess cash — amid growing fears of an economic downturn. David Kostin, Goldman’s chief U.S equity strategist, wrote that many of today’s strongest balance sheets stocks also happen to be growth stocks. The overlap of Strong Balance Sheet stocks and growth stocks means that the balance sheet trade today will continue to reflect Growth Vs. Value, interest rate risk and quality attributes rather than being an expression or expression of ‘quality.’ The firm pointed out that, during the 2011 tech bubble burst — which many investors are comparing to today’s environment — strong balance sheet stocks underperformed. Goldman’s economic team estimates that a recession will not be the main case. They estimate that there is a 35% chance of it happening in the next 2 years. However, the firm recognized that investors and companies seem to be more concerned about a recession. Clients should prepare their portfolio to counter one. Based on history, Goldman expects the S & P 500 to decline to 3,600 in a recession. On Friday, the benchmark was at 4,108.54. That’s about 15% less than it was when it reached its peak. Kostin stated in a Friday note that investors had priced in a significant amount of the risk associated with a recession into US stocks at 4115. Goldman stated that quality investors should look for stocks with an established track record of cash flow growth and stable cash flows. These are the five stocks in the stable growth portfolio. Goldman sees an opportunity in investors buying shares that have excess cash the company could return to shareholders during recessions. According to the note, “Historically when economic growth slows down, investors reward stocks that spend the most on buybacks or dividends.” According to Goldman, the following stocks are strong in terms of their balance sheets and high returns on cash. Goldman advised that “in the face of increasing recession worries, you should focus on stability as well as cash return and not balance sheet strength.”
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