Buy Or Sell? How Goldman Sachs Ranks Stocks

 |  Includes: CSCO, DVMT, ORCL, QCOM
by: Richard Bloch

Business Insider posted an interesting chart that Goldman Sachs had created mapping some large-cap stocks based on growth potential and value.

(Click to view larger version at Business Insider)

Here's another chart (which I created on my own) that basically shows how the mapping works and how a few of the stocks fit in the map just as examples. The X-axis ranks stocks based on growth while the Y-axis ranks stocks based on valuation, both relative to the S&P 500.

Stocks at the bottom left in the grey box are those that are deemed "unattractive" because they have low growth and are too expensive, Duke Energy (DUK), for example. At the upper left are companies like JP Morgan (JPM) - ranked high for value but very low for growth.

At the upper right is the blue "GARP" (growth at a reasonable price) section where you see stocks like Cisco (CSCO). And at the lower right, you find companies like Visa (V), which Goldman evidently sees as having high growth potential, but not ranked high for valuation.

And a stock like Boeing (BA) falls smack dab in the middle.

But the interesting thing about all 5 of these stocks in the chart above is that Goldman rated them all as "buys" - or at least they were on June 29.

Are most of Goldman's buy ratings all over the map? What about their sell ratings?

To find out, I took the liberty of adjusting the map into two versions. One shows only the stocks rated as buys, while the second chart shows the stocks rated "sell" or "neutral."

As you can see, both "buy" rated and "sell" rated stocks do tend to be located all over the map. Yes, there are more buys at the very upper right, but other than that I can't see too much of a distinction between the buy and sell recommendations based on growth and value alone.

So while Goldman does take the time and trouble to map stocks based across two dimensions of growth and value, there's clearly a third dimension (and perhaps others) that the company uses to decide whether to issue a buy or sell recommendation.

As for those buy-rated stocks at the upper right of the map, they do seem to include a range of tech stocks, including Oracle (ORCL), Qualcomm (QCOM), and EMC (EMC) among others.

I wish I could tell you what other criteria Goldman uses to rate stocks, but I can't. That's probably why I don't work at Goldman Sachs and why I likely never will.

Disclosure: I am long CSCO, BA, QCOM, ORCL.