Goldman: Rising rates will hit these stocks hard

Published Mon, Sep 14 20156:12 PM EDTUpdated Tue, Sep 15 20159:38 AM EDT

Goldman Sachs predicts Thursday's highly anticipated meeting by the Federal Reserve will end up with policymakers delaying a potential rate hike until December. "The 'wisdom of the crowds' as represented by Fed funds futures currently assigns just a 28 percent probability that the Fed will hike this month, compared with a 60 percent probability of a raise by December," Goldman's market strategist David Kostin wrote in a recent note to clients. The Federal Reserve advertised for months its intention to increase rates for the first time in nine years, potentially this week, a decision that remains widely debated among investors and economists around the world. Despite the delay, Goldman's investment strategy team believes investors need to get out of the way of rising rates. And there's one group of stocks in particular that could kill your returns for 2015. The investment powerhouse warns that when the tightening cycle eventually begins, the immediate impact will be felt by stocks with high proportions of floating rate debt. Read More How to trade the Fed's meeting this Thursday "Roughly 30 percent of total debt will mature by the end of 2018, while 73 percent will mature between now and 2025," Kostin said, noting that about 8 percent of those figures are in variable-rate, fixed-income instruments. Financials, for example, account for the largest share of total debt in the S & P 500 at about 30 percent. Of that amount, roughly 16 percent is variable rate, a potential negative for the group, Goldman said. Similarly, variable debt in the industrial sector stands at 10 percent. "Interest rate hedges will obviously impact the actual sensitivity of a company's interest expense to a rising rate environment," Kostin said, pointing the group's underperformance in the past as financial conditions tightened. The industries with the lowest variable debt rates are consumer discretionary and material companies, with floating debt accounting for about 2 percent and 1 percent of total debt, respectively. "We advocate that fund managers should own 'quality' stocks and firms with strong balance sheets, while avoiding firms with weak balance sheets and large shares of floating rate debt," Kostin added. Historically, quality stocks tend to outperform during the three months after an initial rate hike, according to Kostin, who explains that during previous rate hikes in 1994, 1999 and 2004, companies with strong balance sheets outpaced those with weak balance sheets by an average of 5 percent. Read More Listen to Tepper, don't drown with these stocks Those stocks with high return on capital, as well as low volatility, also outperformed their lower-quality counterparts by an average of 4 percent and 3 percent, respectively. In the medium term, six months out, defensive sectors widely lagged the S & P 500, as consumer staples, utilities and health care performed the worst following a rate increase, with each of those groups lagging 4 percent on average, Goldman said. The Money Play: From a list of about 40 stocks in Goldman's high-quality basket, CNBC Pro searched for the ones with the highest-growth expectations based on the consensus 12-month target price from Wall Street analysts. Among those names, we then highlight only the names that are members of sectors with the least variable interest rate exposure. Shares of Kinder Morgan , Apple and Dollar Tree all made the list, as highlighted above. Based on analysts' expectations, each name is projected to rise more than 20 percent within the next year.

A Goldman Sachs sign hangs on the floor of the New York Stock Exchange.

Daniel Acker | Bloomberg | Getty Images

Goldman Sachs predicts Thursday's highly anticipated meeting by the Federal Reserve will end up with policymakers delaying a potential rate hike until December.

"The 'wisdom of the crowds' as represented by Fed funds futures currently assigns just a 28 percent probability that the Fed will hike this month, compared with a 60 percent probability of a raise by December," Goldman's market strategist David Kostin wrote in a recent note to clients.

The Federal Reserve advertised for months its intention to increase rates for the first time in nine years, potentially this week, a decision that remains widely debated among investors and economists around the world.

Despite the delay, Goldman's investment strategy team believes investors need to get out of the way of rising rates. And there's one group of stocks in particular that could kill your returns for 2015.