NEW YORK (TheStreet) -- Whether the Federal Reserve decides to raise interest rates this week, or in December asGoldman Sachs (GS - Get Report) predicts, investors are sure to wonder how they can profit from the move -- or at the least, avoid losses.
Reviewing data from rate-increase cycles that began in 1994, 1999 and 2004, the team found that companies with strong balance sheets outperformed their weaker peers by 5 percentage points; those with high returns on capital outperformed by 4 percentage points and those with low volatility outperformed by 3 percentage points.
The Fed's next increase has generated more concern and speculation than usual because it will the first one in nine years. The central bank cut rates to almost zero to bolster the economy during the financial crisis of 2008 and has kept them there ever since, pending positive indicators such as sustained wage growth, low unemployment and inflation near 2%.
While domestic data in recent months has largely supported a rate hike, the central bank has also monitored the global economy to see how slowing growth in China and other emerging markets might affect the U.S. recovery.
Investors looking for quality stocks before the Fed's move should consider Goldman's "High Quality Stock Basket," the New York investment bank says. Recently rebalanced, it comprises 50 stocks from 10 sectors that have strong balance sheets, a history of stable sales and earnings growth and above-average return on equity. Since July, the basket has outperformed the S&P 500 by 4.3%.
Following is a list of the stocks in each sector with the highest quality score:
Consumer Discretionary: Priceline Group
The Connecticut-based discount travel broker tops Goldman Sachs' list of consumer discretionary companies with a 21% projected increase in earnings growth in 2016. The consumer discretionary sector as a whole also has the highest quality rating in Goldman's basket.
With a market value of $66 billion, Priceline (PCLN - Get Report) will likely trade at 20.6 times earnings in the next 12 months, Goldman predicted.
Consumer Staples: McCormick & Co.
At first glance, investors may not recognize the name McCormick & Co. (MKC - Get Report) but its logo has likely found its way onto many spice racks in kitchens across the country. Goldman Sachs projects an 8% growth in earnings for this Maryland-based company in 2016.
McCormick has a market value of $10 billion and will likely trade at 22.8 times earnings in the next 12 months, Goldman predicted.
Energy: National Oilwell Varco
With oil prices taking a serious tumble in 2015, it is difficult to pick a winner in the energy sector. The outlook doesn't appear likely to improve in the near term, either, with Goldman Sachs warning on Friday that oil prices may fall to a low of $20 a barrel before bouncing back.
In fact, Goldman Sachs actually predicts earnings for National Oilwell (NOV - Get Report) a Texas-based provider of drilling equipment, will drop by 26% next year. Still, National Oilwell Varco narrowly beat out Schlumberger (SLB - Get Report) in Goldman's quality score.
The company has a market value of $16 billion and may trade at 19.1 times earnings in the next 12 months, Goldman projected.
Financials: Intercontinental Exchange
With volatility expected regardless of what the Fed announces on Thursday, it's perhaps no surprise that the Intercontinental (ICE) , the company that owns the New York Stock Exchange, has a top spot in Goldman Sachs' financials basket.
Goldman projects that Intercontinental Exchange will have earnings growth of 17% in 2016. The company currently has a market value of $26 billion and will trade at a price of about 18.3 times earnings in the next year, the bank projected.
Health Care: Biogen Inc.
Biogen (BIIB) , a Massachusetts-based pharmaceutical company, is expected to produce 10% earnings growth in 2016.
The company has completed trials for a drug that is used to treat multiple sclerosis and has entered the third phase of testing for a drug used to treat Alzheimer's disease.
Biogen's current market value is $73 billion, and its stock may trade at a price of 18.9 times earnings in the next 12 months, the bank predicted.
Industrials: Stericylce Inc.
Stericycle (SRCL) specializes in the disposal of medical waste and other hazardous materials. Its projected earnings growth for 2016 is 16%.
The New York-based company has a market value of $12 billion, and Goldman predicts a price-earnings multiple of 29 in the next year.
Information Technology: Google Inc.
While Google (GOOG) is going through some changes -- most notably changing its name to Alphabet, Goldman Sachs predicts 17% earnings growth for Google in 2016. By comparison, the team at Goldman sees 8% earnings growth forApple (AAPL) .
Google, based in Silicon Valley, has a market value of $429 billion, and Goldman predicts the tech giant's stock will trade at 20.7 times earnings in the next 12 months.
Materials: Ecolab Inc.
Ecolab (ECL) may not be a company investors are familiar with, but its impact can be felt all over the globe. This Minnesota-based company provides water, heat, and energy technologies to a number of industrial businesses. Goldman Sachs sees its earnings growing 15% in 2016.
Ecolab has a market value of $32 billion and may trade at 22.2 times earnings in the next year, Goldman predicted.
Telecommunications: CenturyLink Inc.
Telecommunications is a lonely sector in Goldman Sachs' basket, with CenturyLink (CTL) being the only company represented.
The outlook for 2016 isn't much brighter, with Goldman Sachs predicting that earnings for the Louisiana-based company will decline 5%.
CenturyLink has a market value of $15 billion, and its stock may be priced at about 11.2 times earnings in the next 12 months, Goldman predicted.
Utilities: PG&E Corp.
Utilities is another lonely sector in Goldman Sachs' basket, with PG&E Corp. the sole entrant. The California-based company is expected to deliver 21% earnings growth in 2016.
PGE&E (PCG) is currently valued at $23 billion, and its stock will probably trade at about 15.3 times earnings in the next 12 months, Goldman predicted.
By Carleton English
Source: http://www.thestreet.com/story/13286705/1/10-stocks-you-ll-wish-you-owned-when-fed-raises-rates.html
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