Goldman says huddle in this kind of stocks as rates jump to 3-year highs

Published Wed, Apr 6 202210:53 AM EDTUpdated Wed, Apr 6 20222:55 PM EDT

Jesse Pound @/in/jesse-pound @jesserpound

With interest rates surging higher, investors may need to take a look at stocks that are generating tons of cash in the near term. The 10-year Treasury yield hit its highest level since 2019 on Wednesday , as another round of aggressive signals from Federal Reserve members has traders bracing for rate hikes and balance sheet reduction from the central bank. When rates rise, duration becomes a key word on Wall Street. It is a measure of how quickly a company's projected cash flows back up its valuation. Rising Treasury yields translate into a higher discount rate, which makes far-off cash flows and earnings less attractive to investors. Short-duration stocks — which are expected to generate a relatively high amount of cash in the near term — typically take the lead when rates rise. "Mathematically, growth stocks that are expected to generate most of their cash flows in the distant future should experience more valuation contraction than their short duration peers for a given change in the discount rate," David Kostin, chief U.S. equity strategist at Goldman Sachs, wrote in a note to clients on April 1. However, long-duration stocks actually outperformed in the back half of March. Some possible reasons for that counterintuitive performance include short covering by hedge funds, the return of retail buyers and the fact that long-duration stocks had already been falling for months, making them attractive relative to history, Goldman said. But this week, now that those stocks are off their lows and interest rates have continued to climb, the short-duration plays may be back in favor. Below are some of the names in Goldman's short-duration basket, with each name having an equity direction below that of the median stock in the Russell 1000 . One new addition to this list of stocks is toymaker Mattel . The stock has risen nearly 4% year to date, and is well liked on Wall Street, with buy ratings from 75% of analysts, according to FactSet. Two other names on the list that have done well in 2022 are in the booming commodities space. Oil producer Coterra Energy and Steel Dynamics have gained roughly 40% and 34% year to date. For investors looking to buy a beaten-down name, Laboratory Corp. of America might make more sense. The stock has slid nearly 16% in 2022, but it has a buy rating from 89% of analysts, according to FactSet. — CNBC's Michael Bloom contributed to this report.

Mattel Inc. Hot Wheels brand matchbox cars are arranged for a photograph in Tiskilwa, Illinois, U.S., on Monday, April 16, 2018.

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With interest rates surging higher, investors may need to take a look at stocks that are generating tons of cash in the near term.