8 Quality Stocks That Can Thrive In A Volatile Market

Economic growth, and thus also growth in corporate earnings, are widely expected to decelerate through 2019, creating an increasingly challenging environment for investors. "Market breadth has sharply narrowed during the recent price volatility," Goldman Sachs observes in a recent report. "Rapid declines in market breadth typically precede larger-than-average drawdowns," they add. In that report, Goldman recommended 50 stocks that they find to be of high quality, based on several key metrics, including: BlackRock Inc. (BLK), PNC Financial Services Group Inc. (PNC), Aflac Inc. (AFL), Oracle Corp. (ORCL), Apple Inc. (AAPL), CVS Health Corp. (CVS), IDEXX Laboratories Inc. (IDXX) and Church & Dwight Co. Inc. (CHD).

Details on these stocks are in the table below. Goldman's quality score is on a scale of 0 to 100, with the median S&P 500 earning a score of 52.

8 Stocks To Thrive As The Market Downshifts

Source: Goldman Sachs

This is the second of two articles that Investopedia is devoting to Goldman's report. Our first article discussed 8 other high quality stocks recommended by Goldman. Their scoring methodology rewards balance sheet strength, stable revenue and profit growth, high ROE, and low risk of big price declines, based on history.

"Market breadth has sharply narrowed during the recent price volatility...rapid declines in market breadth typically precede larger-than-average drawdowns." — Goldman Sachs

Financial stocks started 2018 with high expectations for share price growth, driven by factors such as deregulation and rising interest rates, which should increase profit margins. However, the banking and financial sector has been a big disappointment as a whole, with BlackRock down 31% from its 52-week high, PNC down by 21%, and Aflac off by 11%.

Nonetheless, all 3 of these stocks received strong quality scores from Goldman, have forward P/E ratios below the S&P 500 median, and offer dividend yields in the range of 2.5% to 3.2%, compared to 2.0% for the median S&P 500 stock, per Goldman's analysis. Contrarians may see these as beaten-down stocks poised for rebounds. A big negative, however, is that their projected 2019 EPS growth rates are in the range of 2% to 7%, well below the 10% median for the S&P 500.

Apple, meanwhile, is only 6% off its 52-week high, and CVS is off by 14%. Apple's projected 2019 EPS growth rate of 15% is 500 basis points (bp) better than the S&P 500, yet its forward P/E is equal to the median for that index. CVS looks like a value play given a forward P/E that is nearly 40% lower than the market and a dividend yield that is about 40% higher. However, projected 2019 EPS growth is 9%, versus 10% for the S&P 500.

Apple can be seen as a pure growth play, with much of its future dependent on iPhone sales and upgrades, as well as the development and sale of new apps and new gadgets in the future. Drugstore chain CVS has upbeat assessment from analysts, with a median 12-month price target of $90, or 24% above the Oct. 31 close, per CNN. The company has preliminary approval to pursue its planned merger with health insurer Aetna Inc. (AET), per CNBC, which can be a game changer for the healthcare field, if they succeed in realizing cost-saving synergies as well as cross-selling opportunities.

The future prospects for all these stocks depends heavily on the broad economy, as well as the market in general. If the economy slows considerably, or if it slips into recession, these companies' ability to achieve revenue and profit growth will be tested. Additionally, rising cost pressures, especially rising wages, are a generalized headwind for profit margins. Should a bear market ensue, whatever the cause, bucking the tide may be a difficult proposition for these stocks.