Stock picks to buy for big gains during Q2 earnings season: Goldman – Business Insider
Stocks have been historically volatile in 2020, and anything that brings a little more stability and predictability is going to be deeply appreciated.
Enter liquidity: Goldman Sachs Equity Derivatives Associate Vishal Vivek writes in a note to clients that while overall market liquidity has nosedived this year, the stocks that are the most liquid — meaning they can trade heavily without a clear, volatile drop in price — are faring much better than their peers.
That has huge implications for the upcoming earnings season, which might be the most unpredictable round of company reports in a long time thanks to the economic damage wrought by the coronavirus pandemic.
“Low levels of liquidity can exacerbate stock moves, especially on event days” such as earnings reports, Vivek wrote. “We believe when volumes increase in a stock without a proportionate increase in volatility (two day factors in our liquidity model), it bodes well for performance over the subsequent two weeks.”
While liquidity has improved a little bit since March thanks to high trading volumes, elevated market volatility means it’s still very low compared to recent history. For that reason, the stocks that can endure an increase in trading without a spike in volatility are that much more appealing as earnings get going.
“We expect this indicator to play an important role, as market participants continue to assess the impact of the COVID-19 pandemic on company fundamentals, and liquidity broadly remains low,” he wrote.
Vivek and his team measured the liquidity of every stock on the S&P 500 index based on factors including trading costs, volumes, and bid-ask spreads. They’ve identified these 13 as more liquid than 95% of their peers, which was the average ranking among all the names they picked. Those stocks are ranked from lowest to highest based on that measurement.