Goldman’s list of stocks with great risk-reward ratios
On the age-old trade-off between risk and reward.
Sure, everybody likes a big fat gain on their stock portfolios.
But among Wall Street pros, the game is slightly different, with the highest praise reserved for investors who can generate the strongest returns while taking the least risk. In other words...
There are lots of ways to asses the risks that are factored into “risk-adjusted” returns.
A widely used shortcut is to look at how much an investment gains (or loses) compared to a super safe benchmark — usually US government debt. Then compare that excess gain to the volatility of the investment. (That is, how much its price swings up and down.)
A Stanford economist by the name of William Sharpe came up with a handy formula that spits out a number — known as the Sharpe Ratio — that does just that.
Long story short, the higher the Sharpe Ratio, the better the risk-adjusted returns.
That seems like a good number to have. But for investors hoping to garner low-anxiety gains in the future, there’s a problem: those gains and price swings accounted for in the Sharpe Ratio have already happened. And there’s no guarantee the investment will perform that way in the future.
But maybe there’s a way to find such investments. The big brains down at Goldman Sachs have come up with a measure they call “prospective Sharpe ratios” to, well, prospect for such stocks.
It’s constructed out of expected price gains — a consensus price target published by Wall Street analysts — and a measure of expected price volatility, known as implied volatility, which is a statistical byproduct of the options market.
Analysts used this ratio to scour the S&P 500 for such stocks, which created one of Goldman’s themed baskets of stocks. They just updated the list.
So here, by Goldman’s reckoning, are the S&P 500 stocks that the market sees as the best bets for “risk-adjusted” returns over the next year.
By design, this isn’t the most glamorous list of stocks. LKQ Corp. tops it. (The company owns auto scrapyards, disassembles vehicles and sells them for parts.)
And many others on the list have had especially ugly rides in the market so far this year, like Omnicom, a giant in an industry — advertising — that’s been upended by AI. Viatris has been in the market’s penalty box since the FDA blocked imports from one its key plants in India after finding violations during an inspection. Vaccine maker Moderna has been badly battered by market sentiment as a result of big changes to US health policy under Health & Human Services Secretary Robert F. Kennedy Jr., a longtime leader of the US anti-vaccine movement.
So as you can see, even these companies are not free of risks. In the markets, nothing really is. But smart investors tried to get paid as much as possible for taking them.
