Goldman Sachs revamps "high-quality" stock picks list

Here are its favorite quality stocks.

May 1, 2024 - 06:30

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Goldman Sachs revamps "high-quality" stock picks list

In times of market volatility, it can make sense to emphasize quality stocks.

These companies have strong fundamentals, such as earnings, return on equity (ROE), cash flow, and management strength. Companies that offer regular dividend increases also count.

Quality stocks tend to do particularly well in the middle and later stages of the economy, like now, says Michael Sheldon, executive director of RDM Financial Group.

“In the current environment, exposure to quality companies makes sense, given the uncertainty we face with the economy, inflation, interest rates, and geopolitics,” he told TheStreet.com.

“And while profits are rising, valuations are high.”

Quality stocks can add ballast to your portfolio late in an economic cycle.

According to FactSet, the forward 12-month price-earnings ratio for the S&P 500 was 20 on April 26. That’s well above the five-year average of 19.1 and the 10-year average of 17.8.

Investors interested in owning quality stocks can invest in exchange-traded funds that own them, such as iShares MSCI USA Quality Factor ETF (QUAL) and Invesco S&P 500 Quality ETF (SPHQ) . But if you go that route, make sure your portfolio doesn't get dominated by a small number of sectors.

And remember, while quality stocks are attractive now, they are subject to market volatility just like other stocks. Nevertheless, “it’s a good strategy to include them in your portfolio,” Sheldon said.

Goldman Sachs' High-Quality stocks list

Investors’ focus on quality has served as “one of many factors supporting the recent outperformance” of the Magnificent 7, Goldman Sachs analysts wrote in a commentary to institutional investors.

The Mag 7 includes consumer electronics product wizard Apple (AAPL) , retailer/tech titan Amazon (AMZN) , tech conglomerate Alphabet (GOOG) , social media giant Meta Platforms (META) , software sultan Microsoft (MSFT) , semiconductor king Nvidia (NVDA) , and electric vehicle leader Tesla (TSLA) .

Goldman Sachs regularly updates its basket of high-quality stocks, including large-cap stocks with strong balance sheets, stable sales and earnings growth histories, above-average ROE, and low historical drawdown risk.

It put eight new stocks on the list on April 25, including:

Lululemon Athletica, (LULU) , the athletic apparel company;
Hershey (HSY) , the chocolate company;
Arthur J. Gallagher (AJG) , the insurance broker;
Northern Trust Bank (NTRS) ;
Coterra Energy (CTRA) , an oil and gas producer;
Charles River Labs (CRL) , a drug research company;
KLA (KLAC) , a semiconductor equipment maker; and
F5 (FFIV) , which provides application delivery controllers.

Goldman didn’t comment on the individual stocks, but here’s what Morningstar analysts say about two of the best-known names.

Morningstar on Lululemon, Hershey

Lululemon: “Lululemon has a solid plan to expand its product assortment and geographic reach while building its core business,” wrote Morningstar analyst David Swartz.

“While there are many firms looking to compete in its categories, we believe Lululemon benefits from the athleisure fashion trend.” He thinks it “will continue to achieve premium pricing due to the brand’s popularity and the styling and quality of its products.”

Hershey: “Consumers' penchant for confectionery and snacking fare has yet to be fulfilled, as evidenced by the outsized organic sales growth Hershey has chalked up the past few years,” wrote Morningstar analyst Erin Lash.

“But from our vantage point, this isn't merely a byproduct of a favorable demand environment. Rather, we applaud the strategic focus CEO Michele Buck has brought to bear over the past seven years.”

More Wall Street Analysts:

Meanwhile, other well-known companies in Goldman Sachs' basket include