Global trade war concerns
In the previous part, we noted that Goldman Sachs (GS) believes that rising trade tensions could affect the broader equity markets in the second half of 2018. However, the firm believes that some stocks with strong balance sheets could flourish in the second half despite trade war concerns and higher borrowing costs in the economy.
In the previous article, we saw that David Kostin, the chief US equity strategist at Goldman Sachs, named four stocks—Chipotle Mexican Grill (CMG), Intuitive Surgical (ISRG), Facebook (FB), and NVIDIA (NVDA)—that fulfill these criteria. Goldman Sachs uses a metric known as the Altman Z-Score to interpret the conditions of these companies’ balance sheets.
According to the investment firm, the Altman Z-Score includes several ratios to understand the condition of a company’s balance sheet. These ratios include market cap to liabilities, working capital to assets, earnings before interest and taxes to assets, and retained earnings to assets.
Kostin believes that Facebook (FB) and NVIDIA have higher Altman Z-Scores, which could signal that these companies have strong balance sheets. Facebook and NVIDIA have provided strong returns so far in this year. Year-to-date through July 5, Facebook has risen 11.7% and NVIDIA has risen 24.7%.
In the final part of this series, we’ll analyze Goldman Sachs’s views on the ten-year Treasury yield.