Financial conditions are currently close to the easiest on record, but tightening is on its way.
The Goldman Sachs Financial Conditions Index has five components:
- The 10-year Treasury yield (NYSEARCA:TBT) (NASDAQ:TLT), 45.1% weighting
- Corporate credit spreads (iBoxx Domestic Non-Financials BBB 15Y+ over 10-year), 39.6%
- The Goldman Sachs broad trade-weighted index, 6%
- The S&P 500 (SP500) (NYSEARCA:SPY) scaled by 10-year moving average of earnings, 4.9%
- The midpoint of target fed funds, 4.4%.
As the FCI tightens defensive stocks and those with quality factors outperform, Goldman strategist David Kostin and team say.
They screened the Russell 3000 (NYSEARCA:IWV) for stocks with strong balance sheets, high margins and above-average free cash flow yield:
- Moderna (NASDAQ:MRNA), FCF yield 17%
- Coterra Energy (NYSE:CTRA), 16%
- Regeneron Pharma (NASDAQ:REGN), 13%
- Louisiana-Pacific (NYSE:LPX), 9%
- Skywords Solutions (NASDAQ:SWKS), 8%
- United Therapeutics (NASDAQ:UTHR), 7%
- Royal Gold (NASDAQ:RGLD), 7%
- MKS Instruments (NASDAQ:MKSI), 7%
- Qualcomm (NASDAQ:QCOM), 6%
- SEI Investments (NASDAQ:SEIC), 6%
- Vertex Pharma (NASDAQ:VRTX), 6%
They also screened on the other end for stocks with a high rate of FCF burn relative to cash on the balance sheet:
- Rivian Automotive (NASDAQ:RIVN), implied end 2022 cash -$4.236B
- SunRun (NASDAQ:RUN), -$1.243B
- Gevo (NASDAQ:GEVO), -$706M
- PureCycle Technologies (NASDAQ:PCT), -$396M
- PRA Group (NASDAQ:PRAA), -$374M
- ViaSat (NASDAQ:VSAT), -$360M
- GlobalFoundries (NASDAQ:GFS), -$231M
- Riot Blockchain (NASDAQ:RIOT), -$189M
- Freshpet (NASDAQ:FRPT), -$181M
- Caravana (NYSE:CVNA), -$176M
This strategist says the Fed will need more than rate hikes to tackle inflation.