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What's on Goldman's Volatility Hedges List?

Goldman likes companies with defensive financial returns and financial flexibility amid the market's turmoil this year.
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The stock market has turned quite volatile, with the S&P 500 falling 12% from the beginning of the year through March 14 and rising 7% since then.

So what kind of stocks might you look for in this environment? Goldman Sachs analysts have some ideas. 

“Against the current macro backdrop/market volatility, we focus on two characteristics to identify companies that should be favorably positioned across market environments,” the analysts, led by Deep Mehta, wrote in a report.

The two factors include defensive financial returns and financial flexibility. Goldman defines defensive returns as ones with cash return on cash invested in excess of a company’s weighted-average cost of capital. And Goldman defines financial flexibility as a strong conversion of earnings into free cash flow (FCF), or earnings quality.

Companies that are strong in both those areas, include semiconductor titan Broadcom  (AVGO) , technology-consulting firm Cognizant Technology Solutions  (CTSH) , tobacco giant Philip Morris  (PM) , waste-disposal company Republic Services  (RSG)  and health-insurance stalwart UnitedHealth  (UNH) .

Goldman analysts rate all the stocks as buy.

Buying Rationale

Broadcom has a “strong competitive position across many semiconductor franchises, resilient gross margin profile and healthy FCF generation,” Goldman said.

For Cognizant Technology, “growth and profitability are likely to be supported by the company’s efforts to shift its business toward higher value digital offerings,” Goldman said.

“Pricing is likely to remain relatively stable, and a large India presence can provide structural tailwinds while lowering cost per employee.”

For Philip Morris, “solid product innovation in reduced-risk products (like Iqos) should drive profitable growth ahead, with the company on track to become a majority smoke-free company by 2025,” Goldman said. 

Iqos is Philip Morris’ brand for smoke-free products, including heated tobacco and e-vapor products.

“Management’s plan to introduce innovation at a wider variety of price points over

the next few years should also help address affordability issues, drive accelerated growth and capture more share,” Goldman said.

For Republic Services, growth is key.

“Sustained growth in per unit profitability and high return-on-investment landfill gas and recycling investments pave the way for strong growth ahead,” Goldman said. That growth “is likely underappreciated.”

UnitedHealth Group has a “compelling setup for 2022 driven by upside to the medical loss ratio, outperformance in the Optum Health segment and a larger-than-expected recapture of the 2021 Covid headwind,” Goldman said.

The medical loss ratio measures the amount of premium dollars spent on medical claims divided by administrative costs. Optum Health provides care through local medical groups.