Conventional wisdom says the market’s record rally this year is likely feeding demand for companies with risky balance sheets. That wisdom is wrong, says Goldman Sachs.
Corporate America has ramped up its cash spending thanks to the corporate tax cut, but the spending isn’t making these riskier companies more appealing to investors. In fact, they still prefer those with strong balance sheets, said Goldman’s chief U.S. equity strategist David Kostin.
“Firms boosted total cash spending by 25% to $2.8 trillion in 2018. However, investors have not rewarded most forms of cash spending during the past 12 months,” said Kostin in a note Friday. “Recent market performance indicates a clear investor preference for safe, high quality balance sheets rather than firms investing for growth, returning cash to shareholders, or paying down debt.”
Goldman created a strong balance sheet basket with 50 companies in the S&P 500 that screens high for working capital to assets, retained earnings to assets, operating income to assets, leverage ratio and sales to assets. The basket has outperformed a similar basket of weak balance sheet stocks by 15 percentage points since 2018.
The portfolio also scored a 22% return year to date, beating the S&P 500′s 17% gain and the weak balance sheet basket’s 20% return.
The constituents include Facebook, Chipotle Mexican Grill, Monster Beverage and Nvidia. Facebook has been a front-runner this year among the so-called FANG names with a whopping 48% year-to-date gain. Chipotle is the biggest winner in the market rebound, skyrocketing 82% from December’s sell off as the company crushed Wall Street expectations with its earnings and turnaround plan.
Source: CNBC
Read more:
25 Canada Square, Level 33, office 50, Canary Wharf London, E14 5LQ +44 20 3608 6256
World Financial Markets - 0700 17 600 Varchev Exchange - 0700 115 44
Varchev Finance Ltd is registered in the FCA (FINANCIAL CONDUCT AUTHORITY) with a passport in the United Kingdom: FCA, United Kingdom - registration number: 494 045, which allows provision of financial services in the United Kingdom.
Varchev Finance Ltd strictly comply with the statutes of the European directive MiFID (Markets in Financial Instruments). targeting increased efficiency, transparency and uniformity of financial instruments.
Varchev Finance Ltd is authorized and regulated by the Financial Supervision Commission - Sofia, Bulgaria: License number RG-03-02-05 / 15.03.2006
The information on this site is not intended for distribution or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
Disclaimer:
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 63,41% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.