Clients of Goldman Sachs are spooked.
So says the firm's derivatives team, which says it has seen a "sharp increase" in requests for attractively priced hedging ideas in recent weeks.
The obvious catalyst for this sudden concern is the US-China trade war, which has kicked into high gear in recent weeks. But Goldman says client concerns stretch well beyond that. And for that reason, it's been on the hunt for attractively priced downside protection.
"Broadly, our studies show that puts on stocks with low free cash flow are systematically undervalued," John Marshall, a derivatives strategist at Goldman, wrote in a recent client note. (Puts are options contracts that, when bought, profit when a stock declines.)
But finding such market dislocations is easier said than done, which is why Goldman has created a rigid methodology to aid in its pursuit.
It ultimately amounts to a two-part strategy:
- Identifying stocks with low free-cash-flow yield— "We show that low FCF yield stocks have less downside support than high FCF stocks, yet put prices systematically underprice the downside risk," Marshall said.
- Identifying stocks with downside potential— "We focus on stocks where our analysts see downside potential to their price target and rate the stocks Sell or Neutral."
Of course, one trader's hedge can be another trader's bearish directional wager. In other words, it's also possible to use this strategy to profit from the assumed underlying stock decline — and do so at dirt-cheap prices. It's really up to investors which approach they prefer.
With that established, let's get on to the list. Below are the 16 stocks identified by Goldman as best fitting the criteria listed above.
They're listed in decreasing order of upside to price target. Each entry also provides the cost of 5% out-of-the-market put contracts.
16. Sanderson Farms
Ticker: SAFM
Market cap: $3 billion
Stock rating: Neutral
Upside to price target: -13%
5% OTM option price: 4.3%
15. WEC Energy Group
Ticker: WEC
Market cap: $25 billion
Stock rating: Sell
Upside to price target: -14%
5% OTM option price: 1.4%
14. MACOM Technology
Ticker: MTSI
Market cap: $955 million
Stock rating: Sell
Upside to price target: -14%
5% OTM option price: 9.9%
13. Public Storage
Ticker: PSA
Market cap: $40 billion
Stock rating: Sell
Upside to price target: -14%
5% OTM option price: 1.8%
12. Southern Co.
Ticker: SO
Market cap: $56 billion
Stock rating: Sell
Upside to price target: -15%
5% OTM option price: 1.6%
11. American Water Works
Ticker: AWK
Market cap: $20 billion
Stock rating: Neutral
Upside to price target: -15%
5% OTM option price: 1.4%
10. Realty Income Corp.
Ticker: O
Market cap: $22 billion
Stock rating: Sell
Upside to price target: -17%
5% OTM option price: 1.9%
9. Equity Residential
Ticker: EQR
Market cap: $28 billion
Stock rating: Sell
Upside to price target: -17%
5% OTM option price: 1.7%
8. Navistar International
Ticker: NAV
Market cap: $3 billion
Stock rating: Sell
Upside to price target: -17%
5% OTM option price: 6.8%
7. Veeco Instruments
Ticker: VECO
Market cap: $641 million
Stock rating: Neutral
Upside to price target: -17%
5% OTM option price: 7.3%
6. American Tower
Ticker: AMT
Market cap: $87 billion
Stock rating: Neutral
Upside to price target: -18%
5% OTM option price: 2.0%
5. Tanger Factory Outlet
Ticker: SKT
Market cap: $2 billion
Stock rating: Sell
Upside to price target: -19%
5% OTM option price: 3.9%
4. Unum Group
Ticker: UNM
Market cap: $7 billion
Stock rating: Sell
Upside to price target: -22%
5% OTM option price: 4.3%
3. SunPower
Ticker: SPWR
Market cap: $1 billion
Stock rating: Neutral
Upside to price target: -25%
5% OTM option price: 8.1%
2. Wix.com
Ticker: WIX
Market cap: $6 billion
Stock rating: Neutral
Upside to price target: -26%
5% OTM option price: 6.8%
1. Ventas
Ticker: VTR
Market cap: $23 billion
Stock rating: Sell
Upside to price target: -29%
5% OTM option price: 2.3%