Goldman: Market way overvalued. 4 stocks to short

Published Tue, Apr 14 201512:03 PM EDTUpdated Thu, Apr 16 201511:16 AM EDT

Goldman Sachs sent a note to clients Monday that said the U.S. stock market is the most overvalued in 40 years, excluding the tech bubble. Accordingly, the report by the firm's chief U.S. equity strategist, David Kostin, suggested a number of stocks clients should bet against because of high valuations. Kostin wrote: "The S & P 500 index trades at a forward P/E of 17.2 times, the highest level in the past 40 years outside of the Tech Bubble. The median stock trades above 18 times, ranking in the 99th historical percentile since 1976. Other metrics show a similar picture of stretched valuations, attracting investors looking for overvalued stocks that will prove especially profitable shorts should multiples revert toward historical averages." The strategist points out that 800 trading days have passed without a 10 percent correction for the S & P 500 . Read More 10 stocks to buy as M & A booms "The length of the current rally without a correction has been exceeded only three times since 1930, during the 1960s, mid-1990s, and late 2000s, raising investor concern that the market may be overdue for a correction in the near future," said Kostin in the note. The money play: Goldman identified its short candidates by first searching for stocks in the S & P 500 that trade independently to the market. That is, stocks that move more on their individual merits rather than large macro factors. It then screened those stocks for ones with "sell" recommendations from the firm's individual company analysts. Finally, Goldman applied a valuation screen to find, among those stocks, which companies had the highest price-earnings ratios and other valuation metrics. Just four names made the cut for Goldman's best short ideas: To be sure, short sellers have not fared well during this bull market that has lifted all boats. "The average equity long/short hedge fund returned 2 percent in 2014, 12 percentage points less than the S & P 500," states the firm. But going by this report, Goldman must think that's about to change.

A trader works on the floor of the New York Stock Exchange.

Adam Jeffery | CNBC

Goldman Sachs sent a note to clients Monday that said the U.S. stock market is the most overvalued in 40 years, excluding the tech bubble.

Accordingly, the report by the firm's chief U.S. equity strategist, David Kostin, suggested a number of stocks clients should bet against because of high valuations.