Growth in the U.S. is expected to slow to 2.3% this year, according to the Fed. This is a significant slow down from last year, when the economy grew 4.2% in the second quarter, and 3.4% in the third. Goldman strategists led by David Kostin wrote in a note to clients last week that such deceleration is “often associated with positive stock returns.”
The strategists also noted that the current lower valuations suggest upside potential, though they recommend caution as cash allocations are low and we’re still in a volatile trading environment.
“Investors should own companies with ‘quality’ attributes,” they wrote. “We recommend investors increase portfolio defensiveness” and select “stocks well-positioned to outperform during an uncertain economic environment.”
Goldman’s “margin of safety” valuation analysis screener searched for “stocks that would still trade at less than a 10 percent premium to the historical median if earnings sharply decline. This measure is particularly relevant in light of Apple’s negative preannouncement on Wednesday amid the slowdown in China’s economy,” the note said.
The search also looked for strong balance sheets, dividend yields, and limited popularity among hedge funds.
Sylvia Jablonski, the managing director at Direxion, believes that part of the reason FedEx and UPS were included in Goldman’s list was due to the holiday shopping season, “FedEx and UPS, I actually think that’s based partially off of a strong holiday season too, they’re going to have a big increase in online purchases and the shipping and transportation” of those items, Jablonski said in an interview with Yahoo Finance.
This holiday season was the best for retail in six years, and UPS and FedEx are likely to report an uptick in shipments which will likely push both stocks higher in the near term.
“Consumer staples, they’re basically persistent demand, consistent dividend yield, and they do really well when the markets tend to pull back, so you have names like Walgreens,” said Jablonski. “People will continue going to Walgreens in a good or bad economy.”
Other stocks that made the list are: KLA-Tencor Corp. (NASDAQ: KLAC), International Business Machines (NYSE: IBM), Essex Property Trust (NYSE: ESS), AmerisourceBergen Corp. (NYSE: ABC), Tyson Foods Inc. (NYSE: TSN), C.H. Robinson Worldwide Inc. (NASDAQ: CHRW), and Altria Group (NYSE: MO).
As for the broader market, Kostin’s year-end target for the S&P 500 is 3,000, which is just above the median target of 2,980, according to Bloomberg. His target would put the S&P 500 nearly 16% higher than where it closed on Thursday.
“Weakness in recent regional Fed surveys, the ISM manufacturing index, and China manufacturing PMIs have weighed on investor sentiment,” the note said. Though more stable economic data in the U.S. and the rest of the world could “lift investors’ confidence regarding the longevity of the current expansion, which in July will mark its 10th anniversary (the longest since at least 1850).”