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Goldman: 8 cheap stocks with big upside

NYSE Trader on the floor
Andrew Burton | Getty Images

S&P 500 valuations have declined alongside a drop in profitability in the past 12 months, setting up a potential trade around certain areas of the market, strategists at Goldman Sachs indicated Monday.

In the past year, price-to-book (P/B) metrics for the S&P benchmark fell as profitability ratios, measured by return on equity (ROE), also declined.

"The historical relationship between ROE and the P/B ratio shows investors typically penalize declining profitability with lower valuation," Goldman's chief U.S. equity strategist, David Kostin, wrote in a note to clients.

The S&P 500 currently trades slightly above the 2014 year-end level of 2,059, but the P/B ratio is 4 percent lower at 2.7 times compared with 2.8 times, Kostin noted.

But Goldman told clients to pick up some of these stocks with depressed valuations.

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