The Tell: Here are the not-too-pricey stocks Goldman recommends as economies emerge from coronavirus shutdowns

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As economies around the world remain on pause, it is a given that many of the weakest companies will encounter distress. But the flight into so-called quality stocks has left valuations stretched. So analysts at Goldman Sachs screened stocks that they believe have strong balance sheets and reasonable prices.

The strategy, which Goldman calls “Quality-at-a-Reasonable-Price” is part of a larger way of thinking about investing for the “reopening of the economy.” The analysts also recommend avoiding exposure to small businesses, which are likely to be hit hardest by the lockdowns but least likely to benefit from stimulus — and, separately, to consider buying stocks of goods-producing cyclical companies.

Read:Individual investors have $1.5 trillion of cash on the sidelines, J.P. Morgan says. What next?

The “Quality-at-a-Reasonable-Price” analysis offers 30 stocks; the top 20 are shown in the table below.

Company Sector Price/2021 EPS Altman Z-Score
Monster Beverage Corp. MNST, +1.20% Consumer Staples 24x 22.7
Skyworks Solutions Inc. SWKS, +1.93% Information Technology 13 15.8
IPG Photonics Corp. IPGP, +4.28% Information Technology 25 13
Regeneron Pharma Inc. REGN, -3.30% Health Care 13 12.7
Arista Networks ANET, +0.50% Information Technology 21 12.2
Texas Instruments Inc. TXN, +1.62% Information Technology 23 12.1
Facebook Inc. FB, -1.35% Communication Services 19 11.8
Mastercard Inc. MA, +2.45% Information Technology 27 11.2
Garmin Ltd. GRMN, +2.30% Consumer Discretionary 17 9.4
Alphabet Inc. GOOGL, -0.45% Communication Services 23 9.1
Expeditors International EXPD, +0.50% Industrials 19 8.9
Electronic Arts Inc. EA, -0.24% Communication Services 21 8
C.H. Robinson Worldwide Inc. CHRW, +2.43% Industrials 18 7.2
Home Depot Inc. HD, +2.63% Consumer Discretionary 19 7
W.W. Grainger Inc. GWW, +2.78% Industrials 15 6.8
Robert Half International Inc. RHI, +3.29% Industrials 14 6.6
Colgate-Palmolive Co. CL, -0.51% Consumer Staples 23 6.4
Ross Stores Inc. ROST, +6.24% Consumer Discretionary 18 6
Booking Holdings BKNG, +2.95% Consumer Discretionary 14 5.2
Rockwell Automation Corp. ROK, +4.06% Industrials 21 5.2
Source: Goldman Sachs Global Investment Research

The Goldman analysts explain that the “Altman Z-score” noted in the final column “combines five metrics to assess the likelihood of default: working capital/assets, retained earnings/assets, EBIT/assets, market capitalization/liabilities, and sales/assets.”

Recent analyses suggest defaults among junk-bond issuers could reach anywhere between 8% to 13% by the end of the year.

Goldman’s base-case forecast for defaults, however, is for a rate of 13%, in line with losses suffered as a result of the 2008 financial crisis. But the “downside” estimate is for defaults as high as 18%, a record.

See:Will U.S. stocks lurch lower from here? Look to past ‘waterfalls’ for context

The investment bank ran its valuation screen by using a metric of price divided by 2021 earnings per share, or EPS, “given that we expect substantial revisions to consensus 2020 estimates as the impact of the economic shutdown becomes more clear.” They excluded stocks that ranked in the top 20% of valuations in their respective sectors, and then also excluded those in the bottom 20%, to avoid “value traps.”

Of note, only four energy companies make it through the screen, and all are in the bottom 10 of Goldman’s 30, and thus not noted above.

See:‘We are giving up on energy,’ say Jefferies analysts, who compare the beaten-down sector to the ’62 Mets

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