The stock market cannot escape at the moment. Stocks in the most unprofitable companies are most at risk.
It's been since Thursday morning
S&P 500
was down just over 4% from its record closing high on March 28. The
Russell 2000,
an index of smaller capitalization companies, fell 8%.
However, this does not mean that the losses are over or that it makes sense to buy stocks indiscriminately. Further declines are more than plausible, so it makes sense to look for the companies that are best positioned to weather a difficult period.
Neither indice has really stabilized. In the last few days, the prices have repeatedly moved in the plus, but ended in the red. That means sellers are moving in quickly to push prices down, a pattern that reflects a lack of confidence that stocks will post sustained gains.
Even the morning upswings are mild. Indices opened just a few tenths of a percent on Thursday, another sign of limited buying interest.
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This makes sense because new risks have emerged. Inflation has remained stubbornly high, meaning the Federal Reserve is unlikely to cut its interest rate target soon, policymakers have made clear. In response, market interest rates have risen in recent weeks, threatening to slow economic growth and corporate profits.
What's more, the S&P 500 still trades at about 20 times the total earnings per share that analysts expect from the companies that comprise it over the next 12 months. That's at the high end of the range since the Fed began raising interest rates in early 2022, and means any disappointment in the earnings outlook would push stock prices lower.
This is terrible news for small caps. The performance of smaller companies tends to be more volatile than that of larger ones: They often have higher debt loads but less flexibility to dramatically cut costs when sales decline. Because of this, “investors have shown a strong preference for profitable names,” Dennis DeBusschere of 22V Research wrote on Monday.
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According to 22V Research, compared to the S&P 500, small-cap indices have a larger percentage of stocks that have posted net losses recently.
To find the safer options, Barron's looked for the S&P 500 companies with the 50 highest operating profit margins in 2023. These companies will continue to make profits even if sales decline. They have minimal risk of defaulting on their debts, which means their stock prices are less volatile.
Our list includes well-known names like Visa and McDonald's. As of Thursday morning, they were down only about 2.5% and 3.9%, respectively, since the end of March.
CME Group was down 2.7%, S&P Global was down 2.6%, while Broadcom
'S
The loss was about 3.3%. Microsoft fell 2.8%, while Meta Platforms gained just over 4%.
Some tech names that made it to the list like:
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Nvidia
,
fell more than the S&P 500 because so many fund managers had already invested in them, making them particularly vulnerable to selling. But many of these names will remain.
If you are tempted to buy stocks, you should choose higher quality and more profitable stocks. These are unlikely to face the steepest declines.
Write to Jacob Sonenshine at [email protected]
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