(Bloomberg) — Goldman Sachs economists may not expect the Federal Reserve to raise interest rates until December, but the bank's equity strategists are already preparing clients for the first hike in nearly a decade.
In a note published late last week, David Kostin and team laid out the stocks you want to own and avoid when interest rates rise.
In general, the team found that so called "quality" stocks, or those with strong balance sheets, are the outperformers in the three months after an initial rate hike. Following the first rate hikes in 1994, 1999, and 2004, companies boasting stronger balance sheets outperformed by five percent, on average.
Here's a look at some of the stocks that Goldman recommends in its "High Quality Stock basket:"
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Chipotle
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Dollar Tree
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Pepsi
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Kinder Morgan
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BlackRock
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Google
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Apple
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Priceline
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Oracle
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Wells Fargo
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In terms of stocks to avoid, Kostin and co. say it's companies with lots of floating-rate debt, since their financing costs are likely to increase once the Fed finally moves away from zero bounds interest rates.
When the tightening cycle finally starts, the immediate impact will be felt by firms with high proportions of variable rate borrowing. Stocks with high floating rate debt as a share of total debt outstanding with Sell ratings by Goldman Sachs equity research analysts include CL (Colgate-Palmolive), COL (Rockwell Collins), and JNJ (Johnson & Johnson).
In fact, over the past year, Goldman says that when looking at its list of 50 firms spanning each sector in the S&P 500 with the highest share of floating-rate debt, you'll find that the group has lagged the GS Financial Conditions index by 300 basis points as the firms struggle to keep up with higher interest rates.
