Buy Apple, Coca-Cola Calls as Economy Slows, Goldman Sachs Says
Investors should buy bullish Apple Inc. (AAPL), Coca-Cola Co. and Verizon Communications Inc. (VZ) options because those companies depend less on economic growth, which is projected to slow this year, Goldman Sachs Group Inc. said.
Those equities are attractive for bullish options strategies based on the levels the firm’s stock analysts project the shares will reach, Katherine Fogertey and John Marshall, New York-based equity-derivatives strategists, said. They recommended buying over-the-counter call options 5 percent above the share price while selling calls 15 percent above, a strategy known as a call spread which cuts the cost of the transaction while capping potential profit.
“Consumer staples and telecom services provide an attractive combination of defensiveness, 2012 earnings growth and high dividend yields,” Fogertey and Marshall wrote in a report to clients today. They said the strategy team likes the technology industry because of its “overall strong balance sheet, high foreign sales exposure and stable earnings outlook.”
The S&P 500 declined 11 percent from July 22 through yesterday amid concern that the world’s largest economy may slip into a recession. The International Monetary Fund cut its forecast for global growth yesterday and predicted “severe” repercussions if Europe fails to contain its debt crisis or U.S. policy makers deadlock over a fiscal plan.
The proposals were based on industry-weight recommendations made by Goldman equity strategists, who suggested that investors buy so-called defensive stocks that are less reliant on economic growth, Fogertey and Marshall said. David Kostin, Goldman’s equity strategist, cut his year-end S&P 500 forecast to 1,250 from 1,400 last week. That compares with the average 1,311 estimate among 12 strategists tracked by Bloomberg. The gauge fell 0.2 percent yesterday to 1,202.09.
“Our portfolio strategy team recommends that investors overweight Staples given their defensive characteristics and improving margin outlook,” the options strategists wrote. “Consumer staples has outperformed on average during the late expansion phase of the business cycle and is also well- positioned in a recessionary scenario.”
U.S. gross domestic product may expand by 1.6 percent this year, according to the median of 66 economist estimates in a Bloomberg survey. That’s down from a median forecast of 1.7 percent in August and below last year’s 3 percent rate.
Fogertey and Marshall recommended buying the call spreads on Apple, Coca-Cola, Verizon, Philip Morris International Inc. (PM), Cisco Systems Inc. (CSCO), Comcast Corp. (CMCSA), EMC Corp., Crown Castle International Corp. (CCI), Dean Foods Co. (DF) and SanDisk Corp. (SNDK)
Goldman also suggested buying six-month puts 5 percent below the share price while selling put options 15 percent below on 10 companies in the consumer-discretionary, industrial and materials categories. They recommended the trade on Northrop Grumman Corp. (NOC), Sears Holdings Corp. (SHLD), Vulcan Materials Co. (VMC), Gap Inc. (GPS), Aeropostale Inc. (ARO), Lockheed Martin Corp. (LMT), L-3 Communications Holdings Inc. (LLL), Raytheon Co. (RTN) and Manitowoc Co.
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