Many of the big-name blue chip stocks investors have counted on for gains through the decade-long market expansion have crumbled this year amid sell-offs and heightened volatility. Meanwhile, a number of overlooked "quality" stocks — equities characterized by low debt, high ROEs and stable growth — have outperformed and may do so in the coming months, according to a Goldman Sachs report. Goldman recommends 50 quality stocks in its basket, but we focus on a group of less high-profile known companies, including: Aon PLC (AON), CenturyLink Inc. (CTL), Discovery Communications Inc., (DISCA), Edwards LifeSciences (EW), IDEXX Laboratories (IDXX), MSCI Inc. (MSCI), O'Reilly Automotive (ORLY), and Sysco Corp. (SYY). All of them have dramatically outperformed the S&P 500 thus far this year, as shown below.
8 Stocks To Weather The Storm
- Aon PLC: +18% YTD
- CenturyLink Inc., +14% YTD
- Discovery Communications: +25% YTD
- Edwards LifeSciences, +45% YTD
- IDEXX Laboratories, +25% YTD
- MSCI Inc., +22% YTD
- O’Reilly Automotive: +47% YTD
- Sysco Corp., +11% YTD
Source: Goldman Sachs; As of 12/14
Goldman Sachs’ sector-neutral High Quality basket consists of S&P 500 stocks that have low historical EBIT deviation along with the other characteristics we mentioned. Since the market top in September through the report’s release, the basket outperformed the broader S&P 500 by 3 percentage points. (-6% vs. -9%.)
Here's a look at three of these stocks.
CenturyLink. Legacy landline telecom provider CenturyLink may not be the most popular play for 2019, yet its strong fundamentals and shift towards more profitable, higher-margin businesses and enterprise clients may boost its shares. While Goldman expects sales to fall 2% in 2020, EPS is slated for 11% growth. CenturyLink shares have gained 14% YTD through Dec 14 after multiple years of underperformance. CenturyLink is one of the weaker companies in Goldman's quality basket, with an Altman Z-Score of 0.6 and average ROE is 6%. But as CenturyLink builds out its high-speed internet subscriptions and other services, margins should continue to improve, driving profits and cash flows, per the Motley Fool.
Edwards LifeSciences. The manufacturer of tissue heart valves and repair products, with a market capitalization at $34 billion, has returned a 45% to investors YTD, outperforming its industry peers and withstanding a painful market downdraft toward the close of 2018. The stock’s Altman Z-Score is a 10, a sterling rating, while its average ROE is 23%. Goldman forecasts 2019 earnings growth at 10%. The medical tech firm is expected to benefit from the burgeoning growth of artificial intelligence, a market that generated $8 billion in global revenues in 2017 and is expected to blow past $47 billion in 2020, according to a new IDC spending guide.
O’Reilly Automotive. Auto retail and wholesale parts company O’Reilly Automotive has seen its stock generate momentum this year, up 3% in Q1, 11% in Q2 and 27% in Q3, bringing its YTD gain to 47%, through Dec 14. The stock’s Altman curve Z-score, which measures a company's credit strength and bankruptcy risk, is a very healthy 4.2, while its average ROE is 39%. Goldman expects 2019 earnings to grow by 11%. The company stands to benefit from healthy U.S. consumer spending and broader industry tailwinds, including the next generation of complex-technology embedded vehicles, as outlined by Zack’s.
What’s Next for Investors?
It’s important to note that many of the 50 stocks in Goldman's basket have also been dragged down in the recent rounds of sell-offs. The key is that these companies have the strong balance sheets and stable growth needed to ride out a recession and through a potential bear market, generating healthy returns for investors in the long-term.