One stock trading strategy has quietly been crushing the market -- and Goldman Sachs says it's just getting started

  • As the stock market has been whipsawed by such factors as a trade war and central bank tightening, one trading strategy has quietly outperformed.

  • Goldman Sachs' 2018 market outlook suggests the trade will continue to excel throughout the rest of the year.

Given how choppy the US stock market has been this year, it's proven difficult for traders to find a strategy that's outperformed through thick and thin.

But Goldman Sachs thinks it's found an ace in the hole.

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As traders have stressed themselves out analyzing the winners and losers of such timely issues as a looming trade war and central bank tightening, Goldman is looking somewhere else entirely: the merger and acquisition (M&A) market. Most notably, the companies with the highest likelihood of getting bought.

After all, a Goldman-curated index of stocks with at least a 15% chance of being acquired in the next 12 months has beaten the benchmark S&P 500 by 4 basis points since the start of the year. This is reflected by the sharp increase seen in the gray line in the chart below.

Screen Shot 2018 04 23 at 8.34.52 AM
Screen Shot 2018 04 23 at 8.34.52 AM

Goldman Sachs

It's worth noting that stocks with other positive characteristics — such as capital expenditure and research & development growth — have outperformed over a longer timeframe. Still, on a year-to-date basis, they've been unable to hold a candle to the appreciation seen in possible M&A targets.

That's been largely due to the record pace of deals in the US, totaling $473 billion in the first quarter, a 66% year-over-year increase and the fastest-ever start to a year. Goldman now sees 2018 as "on track to be one of the most active years for large M&A in recent history."

That means the picture around the firm's stock strategy of identifying M&A targets should stay favorable going forward. So if you're going to start using it, there's still time to get involved.

"Continued growth in M&A activity should support the performance of the basket and lift the relative P/E premium toward its high of 55% in 2013," David Kostin, Goldman's chief US equity strategist, wrote in a client note.

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