GOLDMAN SACHS: These 16 stocks will get crushed on a sharp market pullback. Here’s a dirt-cheap way to profit from their demise.

Reuters / Shannon Stapleton

• As investor nerves fray at the edges, Goldman Sachs has seen a sudden uptick in client requests for downside protection.
• The firm has identified 16 vulnerable stocks that have low free cash flow, and whose hedges looks cheap relative to the broader market.
• This stock-identification strategy can also be used to make directional bearish bets that would profit from large share-price losses.
• Visit Business Insider’s homepage for more stories.

Clients of Goldman Sachs are spooked.

So says the firm’s derivatives team, which says its seen a "sharp increase" in requests for attractively priced hedging ideas in recent weeks.

The obvious catalyst for this sudden concern is the US-China trade war, which has kicked into high gear in recent weeks. But Goldman says client concerns stretch well beyond that. And for that reason, it’s be on the hunt for attractively priced downside protection.

"Broadly, our studies show that puts on stocks with low free cash flow are systematically undervalued," John Marshall, a derivatives strategist at Goldman, wrote in a recent client note.

But finding such market dislocations is easier said than done, which is why Goldman has created a rigid methodology to aid in its pursuit.

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It ultimately amounts to a two-part strategy:

1. Identifying stocks with low free-cash-flow yield — "We show that low FCF yield stocks have less downside support than high FCF stocks, yet put prices systematically underprice the downside risk," Marshall said.
2. Identifying stocks with downside potential — "We focus on stocks where our analysts see downside potential to their price target and rate the stocks Sell or Neutral."

Of course, one trader’s hedge can another trader’s bearish directional wager. In other words, it’s also possible to use this strategy to profit from the assumed underlying stock decline — and do so at dirt-cheap prices. It’s really up to an investor which approach they prefer.

With that established, let’s get on to the list. Below are the 16 stocks identified by Goldman as best fitting the criteria listed above.

They’re listed in decreasing order of upside to price target. Each entry also provides the cost of 5% out-of-the-market put contracts — or bets a stock will fall.

16. Sanderson Farms

Markets Insider

Ticker: SAFM

Market cap: $3 billion

Stock rating: Neutral

Upside to price target: -13%

5% OTM option price: 4.3%

Source: Goldman Sachs

15. WEC Energy Group

Markets Insider

Ticker: WEC

Market cap: $25 billion

Stock rating: Sell

Upside to price target: -14%

5% OTM option price: 1.4%

Source: Goldman Sachs

14. MACOM Technology

Markets Insider

Ticker: MTSI

Market cap: $955 million

Stock rating: Sell

Upside to price target: -14%

5% OTM option price: 9.9%

Source: Goldman Sachs

See the rest of the story at Business Insider

See Also:

• MORGAN STANLEY: Trump’s trade war is only part of the battle. Here are 4 other reasons the stock market’s struggles are just beginning.
• BANK OF AMERICA: Buy these 14 stocks, which will surge even as the US hurtles toward a full-blown trade war with China
• Stalled out: Why the rush of IPOs from big, unprofitable companies like Uber and Lyft could throw the entire market off track

Source: Business Insider – jciolli@businessinsider.com (Joe Ciolli)