The “highest quality” stocks within each sector - GS

Goldman Sachs analysts published their “high quality stock” basket.

These are large-cap stocks that have strong balance sheets, a history of stable sales and earnings growth, above-average return-on-equity, and low historical drawdown risk. These stocks also trade at a next-twelve-months price-over-earnings premium ranking that is in the top decile relative to history.

According to a U.S. Weekly Kickstart report, “the strength of ‘quality stocks’ could be attributed to investor concerns about a hard landing, but the growth backdrop has improved substantially during the past 12 months.”

S&P 500 (SP500) EPS grew by 6% year-over-year in the second half of last year, and analysts forecast an 8% growth this year.

“During most previous periods of strong S&P 500 (SP500) profit growth, quality stocks such as those with high returns on capital have typically underperformed and traded with much less of a valuation premium relative to their lower-quality peers,” wrote Analyst David J. Kostin. “Today, rather than growth, concerns over the cost of capital are supporting quality.”

He said that if the Federal Reserve cuts rates later this year, quality stocks may give back some of their recent outperformance, but if the outlook for earnings growth deteriorates, quality stocks may continue to outperform and expand to include stocks with stable growth.

Quality factors (margins, balance sheet, returns, volatility) trade at a valuation premium compared to history, with a valuation percentile of about 80-90%.

These are the constituents of the high quality stock basket, with data as of April 25:

Communication Services (XLC)

• Alphabet Inc. (GOOGL) - Quality score: 94
• Charter Communications (CHTR) - Quality score: 84
• T-Mobile US Inc. (TMUS) - Quality score: 77
• Comcast Corp. (CMCSA) - Quality score: 76
• Meta Platforms Inc. (META) - Quality score: 74

Consumer discretionary (XLY)

• O’Reilly Automotive (ORLY) - Quality score: 98
• Home Depot Inc. (HD) - Quality score: 90
• Tractor Supply (TSCO) - Quality score: 88
• LKQ Corp. (LKQ) - Quality score: 80
• Lululemon Athletica Inc. (LULU) - Quality score: 79

Consumer staples (XLP)

• Church & Dwight (CHD) - Quality score: 94
• Monster Beverage (MNST) - Quality score: 84
• Hershey Co. (HSY) - Quality score: 83

Energy (XLE)

• Marathon Petroleum (MPC) - Quality score: 63
• Coterra Energy Inc. (CTRA) - Quality score: 60

Financials (XLF)

• Intercontinental Exchange (ICE) - Quality score: 87
• MSCI Inc. (MSCI) - Quality score: 87
• Arthur J. Gallagher (AJG) - Quality score: 78
• Truist Financial (TFC) - Quality score: 75
• Raymond James Financial (RJF) - Quality score: 74
• Charles Schwab (SCHW) - Quality score: 69
• Northern Trust (NTRS) - Quality score: 68

Utilities (XLU)

• American Water Works (AWK) - Quality score: 84

Health care (XLV)

• Zoetis Inc. (ZTS) - Quality score: 91
• IDEXX Laboratories (IDXX) - Quality score: 89
• United Health Group (UNH) - Quality score: 89
• STERIS Plc (STE) - Quality score: 88
• ResMed Inc. (RMD) - Quality score: 87
• Charles River Laboratories International (CRL) - Quality score: 82

Industrials (XLI)

• Fastenal Co. (FAST) - Quality score: 94
• Paychex Inc. (PAYX) - Quality score: 91
• Cintas Corp. (CTAS) - Quality score: 91
• Rollins Inc. (ROL) - Quality score: 90

Information technology (XLK)

• Cadence Design Systems (CDNS) - Quality score: 95
• Acenture Plc (ACN) - Quality score: 95
• Synopsys Inc. (SNPS) - Quality score: 90
• Tyler Technologies (TYL) - Quality score: 86
• Monolithic Power Systems (MPWR) - Quality score: 86
• Amphenol Corp. (APH) - Quality score: 86
• Broadcom Inc. (AVGO) - Quality score: 80
• CDW Corp. (CDW) - Quality score: 80
• Fair Isaac Corp. (FICO) - Quality score: 80
• EPAM Systems Inc. (EPAM) - Quality score: 78
• Arista Networks Inc. (ANET) - Quality score: 75
• Microsoft Corp. (MSFT) - Quality score: 75
• Cognizant Tech Solutions (CTSH) - Quality score: 74
• KLA Corp. (KLAC) - Quality score: 73
• F5 Inc. (FFIV) - Quality score: 72

Materials (XLB)

• Sherwin-Williams (SHW) - Quality score: 92

Real estate (XLRE)

• American Tower (AMT) - Quality score: 81