Cash-rich companies are king in the stock market right now


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The days of easy money are over.

And with the Federal Reserve expected to hike interest rates
later this month, equity investors are seeking out companies
well-equipped to withstand tighter lending conditions.

In other words, they want to buy stocks with strong balance
sheets — ones with easy access to liquidity and minimal debt
exposure. And they've already started.

Shares of firms with strong balance sheets are up 11% since
the start of the year, outpacing their flimsier brethren by
3.5 percentage points, according to data compiled by Goldman
Sachs and Bloomberg. That's the widest spread in 14 months for a
period of that length.

The recent outperformance has helped the strong balance sheet
group close the gap on its weaker peers, which have piggybacked
off an unprecedented wave of debt financing to bigger gains
throughout the eight-year bull market.


weak vs strong balance sheetBusiness
Insider / Andy Kiersz, data from Goldman Sachs /
Bloomberg

The accommodative lending conditions, combined with an improving
economic picture, created ideal conditions for traders
looking to take on the added risk of companies with
less-than-stellar finances. And it paid off. The
weak balance sheet group rallied 50 percent in 2013, beating
the 30 percent advance in the S&P 500 that was itself the
best return since 1997.

But now that the increasingly hawkish Fed has started to tighten,
the days of easy gains in highly-leveraged stocks appear to be
winding down. After all, higher-quality companies are better
suited to absorb market shocks, and don't experience as much
volatility.

The strong balance sheet basket maintained by Goldman contains 50
companies across eight core S&P 500 industries that rank
highest in measures comparing equity to total liabilities and
earnings to assets, compiled in a gauge known as the Altman
Z-Score.

As of an update in January, the basket contained Facebook and
Alphabet, which make up half of the so-called FANG group that's
led gains in major US indices this year. The index also
held such companies as Starbucks, Monster Beverage, Exxon
Mobil, Bristol-Myers Squibb and 3M.

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