Goldman’s strategy for higher rates and volatility: Buy these stocks with high cash returns
Goldman Sachs is eyeing stocks that can best navigate a high interest rate environment. The benchmark 10-year Treasury yield surpassed the 5% level Thursday for the first time since July 2007. The 10-year has been surging so far in October, climbing roughly 50 basis points from the start of the month. The move higher in yields follows comments from Federal Reserve Chair Jerome Powell on Thursday that gave investors further signs that the central bank could keep monetary policy restrictive as inflation remains too high. Stocks have been under pressure Friday, with investors looking to find shelter. Goldman said stocks with a history of exceptional financial returns can help ride out the volatility. The firm analyzed companies to see their cash return on cash invested, or CROCI, against the weighted average cost of capital, or WACC. CROCI in its most simple form encapsulates a company’s cash flow generated from holdings or assets that produce income. WACC, meanwhile, captures the cost a company pays to finance its assets. Goldman said viewing stocks through this lens is apt for the current higher interest rate environment and serves as “the hurdle rate investors should use to gauge shareholder value creation.” The firm expects CROCI for stocks on its list to grow at least 75 basis points year over year in 2024 due to strong balance sheets. All the stocks that made the cut have a buy rating from Goldman Sachs. Here is a sample of the names that cleared these hurdles. Tech behemoth and iPhone maker Apple stock has climbed nearly 34% from the start of the year. AAPL YTD mountain Apple stock. Analyst Michael Ng said Apple’s services segment will “drive the majority of gross profit growth over the next 5-years,” while the company builds upon its installed base to drive revenue growth into the future. Ng expects this to happen even if product demand weakens as competition levels off and replacement cycles for devices lengthens. Software firm Adobe stock has climbed more than 61% from the start of 2023. The company is coming off a third-quarter top and bottom line beat . Analyst Kash Rangan expects Adobe to “strategically” embrace artificial intelligence to build its customer base and drive future growth. Shoe giant Nike stock has slipped more than 11% from the start of the year amid worries about consumer spending and a slowing economy. Investors have been more optimistic on the stock of late despite it reporting in late September its first revenue shortfall in two years. NKE YTD mountain Nike stock. Analyst Kate McShane said near-term growth for Nike will likely remain “choppy,” but the company could soon find growth opportunities in both sell-through trends as well as through direct-to-consumer offerings.
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