Goldman sees more volatility ahead, but has a market-beating portfolio of stocks to ride it out

Published Tue, Dec 21 20211:04 PM EST

Volatility is expected to stay elevated into the new year with fears of the fast-spreading omicron Covid variant and the end of ultra-easy monetary policy. One group of stocks particularly thrive in environments of wild price swings, according to Goldman Sachs. The bank is recommending clients stocks with high Sharpe ratios, a measure of a stock's performance relative to its volatility. The bank believes investors should look at stocks with a high level of Sharpe ratio, which it said will deliver the best risk-adjusted returns going forward. The so-called Sharpe ratio is a measure of a stock's performance relative to its volatility. Goldman uses consensus price targets and options six-month implied volatility to measure Sharpe ratios. "Going forward, the combination of rising rates but decelerating growth suggest factor volatility should continue," David Kostin, Goldman's chief U.S. equity strategist, said in a note. "Our High Sharpe Ratio basket contains stocks with the highest prospective risk-adjusted returns." Goldman's high Sharpe ratio basket consists of 50 S & P 500 stocks with the highest prospective Sharpe ratios. It has a long track record of beating the market — the basket has outperformed the S & P 500 in 64% of six-month periods since 1999 by an average of 243 basis points, the bank said. However, the basket has underperformed the S & P 500 recently partially because it has a tilt towards value names which have experienced substantial price declines, Kostin said. From June through November, the basket underperformed the market by about 4 percentage points as virus uncertainty, supply chain bottlenecks and a volatile interest rate market have coalesced to create a difficult environment for value stocks, the Wall Street firm said. Still, "many of these stocks have significant upside to consensus price targets given analysts may be reluctant to change their forecasts," Kostin said. The median basket constituent offers a prospective risk-adjusted return that is more than double that of the median S & P 500 stock, the bank said. The basket contains a couple reopening stocks, including Alaska Air and Southwest Airlines . These two airline stocks were still underperforming the market despite the rebound in travel demand, with shares down 5% and 15%, respectively, year to date. Big-box retailer Target also made the list. The retailer recently reported stronger-than-expected earnings for the fiscal third quarter, as seasonal moments like Halloween and back-to-school boosted sales. The stock is up 24% in 2021. Other names with high Sharpe ratio include T-Mobile, Penn National Gaming , Citigroup and Global Payments.

Traders wearing face masks work on the trading floor at the New York Stock Exchange (NYSE) as the Omicron coronavirus variant continues to spread in Manhattan, New York City, U.S., December 20, 2021.

Andrew Kelly | Reuters

Volatility is expected to stay elevated into the new year with fears of the fast-spreading omicron Covid variant and the end of ultra-easy monetary policy.

One group of stocks particularly thrive in environments of wild price swings, according to Goldman Sachs.