Stocks are struggling, with the S&P 500 down 16% so far this year. Goldman Sachs strategists identify several factors causing the drop.
“The U.S. equity market has been roiled by a series of macroeconomic headwinds since the start of the year,” they wrote in a commentary. That includes Russia’s invasion of Ukraine and soaring oil prices. U.S. oil prices have surged 50% this year.
In addition, “the episodic lockdowns caused by China’s adherence to its zero Covid policy means supply chain disruptions have lingered long after most companies thought that phase of the pandemic was behind us,” the strategists said.
Inflation has surged, leading the Federal Reserve to “adopt an increasingly hawkish policy stance,” the strategists said. Economists and investors expect numerous rate increases for the rest of the year. And Treasury yields have jumped, with the 10-year yield gaining 137 basis points this year to 2.88%.
Goldman Sachs has created a list of “margin of safety” stocks to deal with the uncertainty in the equity market and the economy.
Stocks on the list pass through three screens:
1. “Size and liquidity. That means a market capitalization of greater than $10 billion.
2. “Balance sheet strength.
3. “Attractive valuation.” That means “the price-earnings multiple after applying a 20% haircut to expected 2023 earnings is below the forward P-E ratio at the bottom of either of the two most recent bear markets: March 2009 and March 2020.” A “haircut” means a reduction.
Among the stocks on Goldman’s list are
· Best Buy (BBY), the electronics retailer.
· T Rowe Price (TROW), the money manager.
· Chevron (CVX), the oil producer.
· Electronic Arts (EA), the video game publisher.
· Qualcomm (QCOM), the semiconductor maker.
· Tyson Foods (TSN), the meat processor.
· Vertex Pharmaceuticals (VRTX).
Morningstar on Best Buy
As for Best Buy, “we believe [it] is taking adequate steps to shore up its competitive position in an intensely competitive consumer electronics space,” Morningstar analyst Sean Dunlop wrote in a commentary.
“As the industry emerges from the shadow of Covid-19, it’s become clear that how people shop has permanently changed--with customers demanding seamless omnichannel access to favorite brands, quick fulfillment across channels, and tech solutions to more problems than ever before.”
This plays in Best Buy’s favor, Dunlop said. “[Its] strategic positioning continues to resonate, with the firm leveraging its physical footprint for fulfillment and post-sale services, emphasizing its differentiated service offering, and experimenting with newer store formats,” he said.
Dunlop puts fair value at $126 for the stock, compared to a recent quote of $85.30
Morningstar on T. Rowe Price
Turning to T. Rowe Price, it faces issues in the short term, says Morningstar analyst Greggory Warren. “[It’s] highly leveraged to growth equities, which means that market losses are likely to remain elevated, and flows will remain weak, in the near term,” he wrote in a commentary.
But, “flows should pick up after 2025 when fewer baby boomers retire and millennials start hitting their peak earnings years, with net redemptions from retirement plans being less of a drag on flows.”
Further, “in an environment where active fund managers are under assault for poor relative performance and high fees, we believe wide-moat-rated T. Rowe Price is the best positioned of the U.S.-based active asset managers we cover,” Warren said.
He puts fair value at $165 for the stock, compared to a recent quote of $121.95.
