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Goldman's Strong and Weak Stocks for Fed Tightening

The strong stocks for a tightening environment include Qualcomm, Moderna, Regeneron and Louisiana-Pacific.
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Now that the Federal Reserve appears poised to begin raising interest rates in March, what kind of stocks might you want to consider in an environment of Fed tightening?

Goldman Sachs has an answer. “The performance of stocks with perceived ‘quality’ attributes such as high return on capital, strong balance sheets, and low realized volatility is positively correlated with tighter financial conditions,” Goldman chief U.S. equity strategist David Kostin wrote in a commentary cited on CNBC.

Goldman selected strong stocks and weak stocks from the Russell 3000 based on that criteria. For the good stocks, Goldman chose companies with strong balance sheets, high profit margins and reasonable valuations, CNBC reported.

The stocks have above-average free cash flow yields and Altman Z-scores and 2022 net profit margins in the top 25% of the index. The Altman Z-score measures the likelihood of a company entering bankruptcy.

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Stocks that made Goldman’s good list include Qualcomm  (QCOM) - Get Qualcomm Inc Report, Moderna  (MRNA) - Get Moderna, Inc. Report, Regeneron  (REGN) - Get Regeneron Pharmaceuticals, Inc. Report, Louisiana-Pacific  (LPX) - Get Louisiana-Pacific Corporation Report, SEI Investments  (SEIC) - Get SEI Investments Company Report, Skyworks Solutions  (SWKS) - Get Skyworks Solutions, Inc. Report and United Therapeutics  (UTHR) - Get United Therapeutics Corporation Report.

As for bad stocks, “firms with weak balance sheets have greater risk of needing to access financial markets at an inopportune moment — potentially leading to spending cuts, dilutive equity offerings, poor debt terms, and a higher cost of capital,” Kostin said.

For its negative stock list, Goldman chose companies with weak balance sheets and a high rate of free cash flow burn compared to cash on the balance sheet.

Stocks on this list include Rivian Automotive  (RIVN) - Get Rivian Automotive, Inc. Class A Report, SunRun RUN, Riot Blockchain  (RIOT) - Get Riot Blockchain Inc Report and Carvana  (CVNA) - Get Carvana Co. Class A Report.