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The recent sharp drawdown in stocks presents a buying opportunity for those stocks that are positioned to withstand a double whammy of higher interest rates and an economic slowdown, according to Goldman Sachs. “Although we expect headwinds to discount rates and balance sheets to persist, we would view a substantial further downgrade to the growth outlook as a buying opportunity,” David Kostin, Goldman’s chief U.S. equity strategist, said in a note to clients. The S & P 500 in October is on track to lose ground a third-straight month, and has fallen 10% from its recent peak in July to enter a correction. Investors have grappled with surging bonds yields and now the war in the Middle East, while the latest earnings season has been murky, further denting risk appetites. The Wall Street investment bank believes the economy will deteriorate less than the consensus view, due in part to resilient consumer spending. The firm’s economists forecast real GDP growth will slow to 2% in 2024, better than an average forecast of 1% on Wall Street. Therefore, Goldman believes many cyclical stocks, or those with a high sensitivity to the economy, shouldn’t suffer. In fact, the firm is recommending some of them that have underperformed the rest of the market yet offer strong fundamentals. “We therefore remain wary of long-duration and highly levered stocks but think investors should treat cyclical sell-offs as a buying opportunity,” Kostin said. Here are the yardsticks Goldman used for its screen of cyclical laggards with strong balance sheets: S & P 1500 stocks in cyclical industry groups Market capitalizations of at least $2 billion EBIT interest coverage at least 5 times Net leverage less than 2 times Stock declines at least 10% since the end of July Excludes stocks with negative consensus 2024 earnings per share revisions over the past 3 months Among the consumer names that surfaced were Academy Sports and Outdoors , PVH Corp . and M.D.C. Holdings. Energy stocks Devon Energy and Patterson-UTI Energy also made the list.
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