Against an economic landscape marked by rising interest rates and growing trade tensions, Goldman Sachs Group Inc. (GS) believes that companies with strong balance sheets are particularly well-suited to ride out the turbulence. Among the 50 stocks in their Strong Balance Sheet basket are these 12 outperformers so far in 2018: Facebook Inc. (FB), Nvidia Corp. (NVDA), Accenture PLC (ACN), J.B. Hunt Transport Services Inc. (JBHT), Expeditors International of Washington Inc. (EXPD), Edwards Lifesciences Corp. (EW), Align Technology Inc. (ALGN), Sysco Corp. (SYY), Costco Wholesale Corp. (COST), Michael Kors Holdings Ltd. (KORS), Ross Stores Inc. (ROST) and Alphabet Inc. (GOOGL).
"We expect strong balance sheet stocks will continue to outperform given record-high net leverage for the median S&P 500 stock and tightening financial conditions," Goldman says in its latest U.S. Weekly Kickstart report.
|Accenture||6.7%||Management & tech consulting|
|Align Technology||52.4%||Dental technology|
|Alphabet||6.0%||Information and applications|
|Edwards Lifesciences||29.1%||Heart valve repair|
|Expeditors International||11.7%||Shipping & logistics|
|J.B. Hunt||6.1%||Trucking & logistics|
|Michael Kors||4.7%||Fashionable apparel|
|Ross Stores||6.1%||Discount retailing|
|Sysco||12.9%||Food service distributor|
|S&P 500 Index (SPX)||1.5%|
Sources: Goldman Sachs; YTD gain data per CNBC through the close on July 3.
Goldman indicates that the median stock in their Strong Balance Sheet basket gained 6% year-to-date through June 28, versus 0% for the median S&P 500 stock.
Reasons for Continued Outperformance
As quoted above, Goldman finds that S&P 500 companies are more leveraged than ever. Corporations loaded up on debt while interest rates were pushed down to historic lows by the Federal Reserve, a policy response intended to prevent the financial crisis of 2008 from triggering a severe economic downturn along the lines of the Great Depression of the 1930s. Now the Fed is unwinding that policy, and rates are on the rise, which will crimp profit margins at leveraged companies are forced to refinance their debt.
By contrast, strong balance sheet companies, as defined by Goldman, will see a slower increase in debt servicing costs as interest rates rise. While the Fed Funds futures market expects three more rate hikes by the Fed through the end of 2019, Goldman projects six more. Investopedia recently devoted two other articles to Goldman's Strong Balance Sheet investment strategy. These present more stocks in this basket, and discuss the selection criteria. Among Goldman's notable findings is that the current constituents of the basket include many high-growth companies. (For more, see also: 8 Stocks That Are Crushing the S&P 500 and 7 Stocks That Are Speeding Past the Market.)
Edwards Lifesciences focuses on treatments for cardiovascular diseases. Per Seeking Alpha, Edwards is the beneficiary of a government-created duopoly that is limiting competition for transcatheter aortic value replacement (TAVR) technology, in which Edwards is a player. TAVR is a promising alternative to open heart surgery, and Seeking Alpha cites statistics from the Centers for Disease Control and Prevention that show cardiovascular diseases (CVDs) to be the leading cause of death in the U.S., more than all forms of cancer combined. Moreoever, the odds of developing CVDs increase with age, whereas the odds of developing cancer decline after age 75.
Align Technology produces a cutting-edge alternative to braces for straightening teeth called Invisalign. As the name implies, it is clear, virtually invisible, and made to measure for the patient through advanced scanning and 3-D printing technology, per the company's website. Zacks Investment Research reports that use of this product is growing rapidly, with case shipments up by nearly 31% year-over-year in the first quarter. The user base in the first quarter had grown to nearly 47,000 dentists and orthodontists worldwide.