Shares of companies with high operating or financial leverage are outperforming the market, as investor sentiment about the economy improves.
Two portfolio indexes of such stocks maintained by Goldman Sachs Group Inc. have outpaced the Standard & Poor’s 500 Index since October, a sign that riskier investment strategies are gaining favor. As the expansion strengthens, companies with higher fixed cost structures or weaker balance sheets are “more likely to benefit from that recovery,” said Tim Ghriskey, who oversees about $2 billion as chief investment officer of Solaris Group LLC, based in Bedford Hills, New York.
Goldman Sachs’ Weak Balance Sheet Basket -- comprising 51 companies including hospital operator Tenet Healthcare Corp. and truck lessor Ryder System Inc. -- has outpaced the S&P 500 by 8.8 percentage points since Oct. 1. The bank’s High Operating Leverage Basket -- made up of subscription-video service Netflix Inc., technology consultant Computer Sciences Corp. and 50 other members -- is almost 14 percentage points ahead.
A rise to new relative highs would be a confirming signal for investors looking to see if the recent jump in the S&P 500 is durable, Ghriskey said. The benchmark index closed at 1,466.47 on Jan. 4, the highest since Dec. 31, 2007, and has climbed 3.1 percent since then.
Slow, Steady
Gains in the Goldman Sachs baskets since the fourth quarter of 2012 “match what we’re seeing in the economy, which has been a resumption of slow, steady improvements,” he added.
While U.S. gross domestic product unexpectedly contracted at a 0.1 percent annual rate in the three months ended Dec. 31, rising auto sales led a 2.2 percent advance in consumer spending, which accounts for about 70 percent of the economy. A jump in pay may have helped. After-tax income rose 6.8 percent from October through December, the most in four years.
Housing and employment also are strengthening. The S&P/Case-Shiller index of property values in 20 U.S. cities increased 5.5 percent in the year through November, the largest gain since August 2006. And U.S. employers added 157,000 workers in January, following a revised 196,000 advance the prior month, based on data from the Labor Department.
The relative outperformance of risky equities “shows that the market’s rally has broadened recently,” according to Jim Stellakis, founder and director of research at Greenwich, Connecticut-based research company Technical Alpha Inc. and a chartered market technician. “Investors are more comfortable having their money parked in these types of stocks now.”
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