Goldman screens for best and worst stocks for tightening financial conditions

Financial conditions are currently close to the easiest on record, but tightening is on its way.

Money markets are pricing 100% of a quarter-point rate hike in March and a significant change of a half-point rise. The Nasdaq (COMP.IND) (NASDAQ:QQQ) had had its worst January ever.

The Goldman Sachs Financial Conditions Index has five components:

1. The 10-year Treasury yield (NYSEARCA:TBT) (NASDAQ:TLT), 45.1% weighting
2. Corporate credit spreads (iBoxx Domestic Non-Financials BBB 15Y+ over 10-year), 39.6%
3. The Goldman Sachs broad trade-weighted index, 6%
4. The S&P 500 (SP500) (NYSEARCA:SPY) scaled by 10-year moving average of earnings, 4.9%
5. The midpoint of target fed funds, 4.4%.

As the FCI tightens defensive stocks and those with quality factors outperform, Goldman strategist David Kostin and team say.

They screened the Russell 3000 (NYSEARCA:IWV) for stocks with strong balance sheets, high margins and above-average free cash flow yield:

1. Moderna (NASDAQ:MRNA), FCF yield 17%
2. Coterra Energy (NYSE:CTRA), 16%
3. Regeneron Pharma (NASDAQ:REGN), 13%
4. Louisiana-Pacific (NYSE:LPX), 9%
5. Skywords Solutions (NASDAQ:SWKS), 8%
6. United Therapeutics (NASDAQ:UTHR), 7%
7. Royal Gold (NASDAQ:RGLD), 7%
8. MKS Instruments (NASDAQ:MKSI), 7%
9. Qualcomm (NASDAQ:QCOM), 6%
10. SEI Investments (NASDAQ:SEIC), 6%
11. Vertex Pharma (NASDAQ:VRTX), 6%

They also screened on the other end for stocks with a high rate of FCF burn relative to cash on the balance sheet:

1. Rivian Automotive (NASDAQ:RIVN), implied end 2022 cash -$4.236B
2. SunRun (NASDAQ:RUN), -$1.243B
3. Gevo (NASDAQ:GEVO), -$706M
4. PureCycle Technologies (NASDAQ:PCT), -$396M
5. PRA Group (NASDAQ:PRAA), -$374M
6. ViaSat (NASDAQ:VSAT), -$360M
7. GlobalFoundries (NASDAQ:GFS), -$231M
8. Riot Blockchain (NASDAQ:RIOT), -$189M
9. Freshpet (NASDAQ:FRPT), -$181M
10. Caravana (NYSE:CVNA), -$176M

This strategist says the Fed will need more than rate hikes to tackle inflation.