Goldman Sachs: Stock Picks for a New Era

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Many stock investors are searching for new strategies as volatility plunges to near a 50-year low on Wall Street. With that in mind, Goldman Sachs Group Inc. recommends 50 stocks that should thrive in what's expected to be a new era of prolonged, low market volatility, per their latest U.S. Weekly Kickstart report. Notably absent from Goldman's list are the high-flying mega-cap tech stocks such as Microsoft Corp. (MSFT

) and the so-called FAANG five, Facebook Inc. (FB ), Apple Inc. (AAPL ), Amazon.com Inc. (AMZN ), Netflix Inc. (NFLX ) and Alphabet Inc. (GOOGL ), the parent of Google.

 

Sharpe's Risk-Adjusted Approach

Instead, Goldman suggests an equal-weighted, sector-neutral portfolio of the 50 S&P 500 stocks with the highest prospective Sharpe Ratio. The Sharpe Ratio is a commonly used method for estimating risk-adjusted returns, developed by Nobel Prize-winning economist William F. Sharpe.

The S&P 500 Index (SPX) has registered extremely low volatility over the last six months, and Goldman anticipates that volatility will remain under its long-term average over the next five years. Accordingly, Goldman believes that "fund managers should seek to maximize prospective risk-adjusted returns rather than minimize realized volatility." Over the last five years, investor money has been flooding into ETFs that seek to minimize volatility, but Goldman notes that its high Sharpe Ratio strategy typically outperforms a volatility-minimization strategy in periods of low volatility.

71% Rate of Outperformance

Goldman says that its basket of high Sharpe Ratio stocks has outperformed the S&P 500 in 71% of the semi-annual periods since 1999. Moreover, this strategy has beaten the S&P 500 by an average of 362 basis points per six-month period, or about 725 basis points annually, Goldman adds. More recently, Goldman says that its basket has beaten the S&P 500 by 203 basis points for the six-month period ending June 15. The stocks in this basket are rebalanced every six months, the last reshuffling having taken place as of June 15, with only 10 stocks retained from the previous lineup.

Current Picks

Among the familiar technology names in Goldman's revised basket are Hewlett-Packard successor companies HP Inc. (HPQ

) and Hewlett-Packard Enterprise Co. (HPE ), as well as microprocessor maker Intel Corp. (INTC ). All are new additions. Salesforce.com Inc. (CRM ), developers of customer relationship management software, is a holdover from the previous Sharpe basket.

 

Goldman has even found value in beleaguered industries such as brick-and-mortar retailing, given the presence of discount variety store operator Dollar Tree Inc. (DLTR

) and athletic footwear and apparel seller Foot Locker Inc. (FL ), both new additions. Financial companies identified by Goldman run the gamut from credit card and online banking provider Discover Financial Services (DFS ) to nationwide commercial and investment banking giant JPMorgan Chase &Co. (JPM ), both also new additions.

 

CEOs Are Buying

Two new names in Goldman's revamped basket also are noteworthy as companies whose CEOs recently made significant share purchases for their personal accounts. These are Andarko Petroleum Corp. (APC

) and cloud computing services provider Akamai Technologies