GOLDMAN SACHS: These 16 stocks will get crushed on a sharp market pullback. Here’s a dirt-cheap way to profit from their demise.

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Reuters / Shannon Stapleton

  • As investor nerves fray at the edges, Goldman Sachs has seen a sudden uptick in client requests for downside protection.
  • The firm has identified 16 vulnerable stocks that have low free cash flow and whose hedges looks cheap relative to the broader market.
  • This stock-identification strategy can also be used to make directional bearish bets that would profit from large share-price losses.
  • Visit Business Insider’s homepage for more stories.

Clients of Goldman Sachs are spooked.

So says the firm’s derivatives team, which says it has seen a “sharp increase” in requests for attractively priced hedging ideas in recent weeks.

The obvious catalyst for this sudden concern is the US-China trade war, which has kicked into high gear in recent weeks. But Goldman says client concerns stretch well beyond that. And for that reason, it’s been on the hunt for attractively priced downside protection.

“Broadly, our studies show that puts on stocks with low free cash flow are systematically undervalued,” John Marshall, a derivatives strategist at Goldman, wrote in a recent client note. (Puts are options contracts that, when bought, profit when a stock declines.)

But finding such market dislocations is easier said than done, which is why Goldman has created a rigid methodology to aid in its pursuit.

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It ultimately amounts to a two-part strategy:

  1. Identifying stocks with low free-cash-flow yield— “We show that low FCF yield stocks have less downside support than high FCF stocks, yet put prices systematically underprice the downside risk,” Marshall said.
  2. Identifying stocks with downside potential— “We focus on stocks where our analysts see downside potential to their price target and rate the stocks Sell or Neutral.”

Of course, one trader’s hedge can be another trader’s bearish directional wager. In other words, it’s also possible to use this strategy to profit from the assumed underlying stock decline — and do so at dirt-cheap prices. It’s really up to investors which approach they prefer.

With that established, let’s get on to the list. Below are the 16 stocks identified by Goldman as best fitting the criteria listed above.

They’re listed in decreasing order of upside to price target. Each entry also provides the cost of 5% out-of-the-market put contracts.


Markets Insider

Ticker: SAFM

Market cap: $3 billion

Stock rating: Neutral

Upside to price target: -13%

5% OTM option price: 4.3%

Source: Goldman Sachs


Markets Insider

Ticker: WEC

Market cap: $25 billion

Stock rating: Sell

Upside to price target: -14%

5% OTM option price: 1.4%

Source: Goldman Sachs


Markets Insider

Ticker: PSA

Market cap: $40 billion

Stock rating: Sell

Upside to price target: -14%

5% OTM option price: 1.8%

Source: Goldman Sachs


Markets Insider

Ticker: SO

Market cap: $56 billion

Stock rating: Sell

Upside to price target: -15%

5% OTM option price: 1.6%

Source: Goldman Sachs





6/

11. American Water Works


Markets Insider

Ticker: AWK

Market cap: $20 billion

Stock rating: Neutral

Upside to price target: -15%

5% OTM option price: 1.4%

Source: Goldman Sachs





7/

10. Realty Income Corp.


Markets Insider

Ticker: O

Market cap: $22 billion

Stock rating: Sell

Upside to price target: -17%

5% OTM option price: 1.9%

Source: Goldman Sachs


Markets Insider

Ticker: EQR

Market cap: $28 billion

Stock rating: Sell

Upside to price target: -17%

5% OTM option price: 1.7%

Source: Goldman Sachs





9/

8. Navistar International


Markets Insider

Ticker: NAV

Market cap: $3 billion

Stock rating: Sell

Upside to price target: -17%

5% OTM option price: 6.8%

Source: Goldman Sachs


Markets Insider

Ticker: VECO

Market cap: $641 million

Stock rating: Neutral

Upside to price target: -17%

5% OTM option price: 7.3%

Source: Goldman Sachs


Markets Insider

Ticker: AMT

Market cap: $87 billion

Stock rating: Neutral

Upside to price target: -18%

5% OTM option price: 2.0%

Source: Goldman Sachs





12/

5. Tanger Factory Outlet


Markets Insider

Ticker: SKT

Market cap: $2 billion

Stock rating: Sell

Upside to price target: -19%

5% OTM option price: 3.9%

Source: Goldman Sachs


Markets Insider

Ticker: UNM

Market cap: $7 billion

Stock rating: Sell

Upside to price target: -22%

5% OTM option price: 4.3%

Source: Goldman Sachs


Markets Insider

Ticker: SPWR

Market cap: $1 billion

Stock rating: Neutral

Upside to price target: -25%

5% OTM option price: 8.1%

Source: Goldman Sachs


Markets Insider

Ticker: VTR

Market cap: $23 billion

Stock rating: Sell

Upside to price target: -29%

5% OTM option price: 2.3%

Source: Goldman Sachs

Get the latest Goldman Sachs stock price here.

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