The recent stock market downdraft has investors focusing on stocks that retain upside potential in uncertain times. Meanwhile, Goldman Sachs says that the "sell-off appears overdone relative to fundamentals" and adds that "we continue to recommend owning 'quality' stocks that should outperform as the cycle matures and economic growth decelerates." To that end, Goldman's most recent U.S. Weekly Kickstart report presents a basket of 50 high quality stocks that includes these 8: Accenture PLC (ACN), Mastercard Inc. (MA), Ross Stores Inc. (ROST), Ansys Inc. (ANSS), C.H. Robinson Worldwide Inc. (CHRW), Cognizant Tech Solutions Corp. (CTSH), Edwards Lifesciences Corp. (EW) and Paychex Inc. (PAYX).
This is the first of two stories that Investopedia will devote to this report, and details on these 8 stocks are in the table below. Goldman Sachs' quality score is on a scale of 0 to 100.
Quality Stocks At Discount Prices
Source: Goldman Sachs; ROE computed on a last 12 months (LTM) basis.
Significance For Investors
Goldman bases its quality scores on these factors: strong balance sheets, stable sales and EPS growth, high return on equity (ROE) and "low historical drawdown risk." They note that their basket of quality stocks has outperformed the S&P 500 Index (SPX) by 415 basis points (bp) year-to-date (YTD) and by 100 bp since Oct. 3. Goldman's calculations were performed as of Oct. 25.
The median stock in the high quality basket has a quality score of 81, versus 52 for the median S&P 500 stock. Regarding ROE, the respective figures are 21% and 18%. Estimated EPS growth in 2019 is the same for both the median stock in the basket and the median S&P 500 stock, at 10%, and the median stock in the basket is slightly more expensive, with a forward P/E ratio of 19, versus 16 for the S&P 500.
Quality stocks "should outperform as the cycle matures and economic growth decelerates." — Goldman Sachs
With a quality score of 93, ROE of 91% and projected 2019 EPS growth of 17%, Mastercard is among the standouts in the basket. As a result, it also commands a rich forward P/E of 30 times projected next 12 month (NTM) earnings. Mastercard has been posting faster growth rates than its longtime rival Visa Inc. (V), and it derives a larger share of revenue from international sources, which are growing more quickly than domestic sources, Barron's reports. A macro tailwind favoring both companies is a secular movement towards online payments and away from cash and checks, Barron's adds.
Ross Stores is just below Mastercard on Goldman's scale, with a quality score of 92. In addition to a robust 50% ROE, it has projected 2019 EPS growth of 11%, and it trades at a forward P/E of 22, per Goldman. Ross operates discount clothing stores and has "a long history of growing same-store sales, opening new stores, and expanding to new states," per Seeking Alpha, which adds that they offer a "treasure hunt" experience based on "rapidly turning low-priced inventory." This experience, which cannot be replicated online, appeals to many consumers.
In the same report, Goldman warns about macro trends that could halt the bull market. These same forces pose risks for the 8 stocks listed above, and were detailed in an earlier Investopedia article. Among these trends, of particular concern for the 8 stocks is Goldman's forecast that the U.S. GDP growth rate will fall to an annualized pace of 1.6% by 4Q 2019, much lower than the consensus view of economists and the view of the Federal Reserve.