To help investors think through an opaque investment landscape and economic cycle, Goldman Sachs recently provided clients with a list of companies that are generating loads of cash, generally considered a sign of a well-run company.
The bank screened companies in its research universe to identify strong cash returns on cash investedor CROCI, relative to the weighted-average cost of capitalor 21 options, and robust free-cash conversions.
This suggests that they could prove to be hidden gems, or underappreciated businesses, in a market that remains heavily focused on major technology stocks, including Alphabet GOOGLAmazon.
Such lists are interesting because they show a substratum of the stock market that is often not even noticed by the majority of investors who are focused on the momentum of top names. The list, however, is best used as a curiosity.
Consider Etsy, an online crafts marketplace. Goldman Sachs advised clients to buy a call option with a strike price just above the stock price, and to focus on options that expire in three months. If the stock is below the strike price at expiration, the trade fails.
Close 21 High-Quality Stocks and the Case for Playing Them With Options At a time when Covid has deprived 21 options many operating executives of any meaningful transparency into their businesses, traditional profitability metrics are likely to become even more important to investors.