In the face of a slowing economy, companies with low operating leverage should outperform, according to Goldman Sachs.
Companies with low operating leverage tend to have higher costs associated with more sales, but they have lower fixed costs to cover each month. So when companies are experiencing a drag on sales from a slowing economy, those with low operating leverage will be less affected, Goldman said.
“U.S. economic growth has sharply decelerated since early December. In the current macro environment, we recommend investors own stocks with low operating leverage and sell companies with high operating leverage,” Goldman’s chief U.S. equity strategist David Kostin said in the note. “Low operating leverage firms are those with the smallest share of fixed costs as a percent of revenue.”
Recent weak economic data including retail sales have forced Wall Street analysts and economists to slash their growth forecasts, which have come down at a fast pace. J.P. Morgan economists last week cut their forecasts for first quarter growth to 1.5 percent while many others see growth holding just above 2 percent. Consensus earnings growth estimates for S&P 500 firms have also been cut drastically as the first-quarter growth forecast has turned negative.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.