This should be a volatile week for equities. (Photo: AP)

Goldman Sachs economists may not expect the Federal Reserve to raise interest rates until December, but the bank’s equity strategists are already preparing clients for the first hike in nearly a decade. 

In a note published late last week, David Kostin and his team laid out the stocks you want to own and avoid when interest rates rise. 

In general, the team found that so-called “quality” stocks, or those with strong balance sheets, are the outperformers in the three months after an initial rate hike. Following the first rate hikes in 1994, 1999, and 2004, companies boasting stronger balance sheets outperformed by 5 percent, on average. 

Here’s a look at some of the stocks that Goldman recommends in its ”High Quality Stock basket.”
  • Chipotle
  • Dollar Tree
  • Pepsi
  • Kinder Morgan
  • BlackRock
  • Google
  • Apple
  • Priceline
  • Oracle
  • Wells Fargo

In terms of stocks to avoid, Kostin and his team say it’s companies with lots of floating-rate debt, since their financing costs are likely to increase once the Fed finally moves away from zero-bound interest rates.  

“When the tightening cycle finally starts, the immediate impact will be felt by firms with high proportions of variable rate borrowing. Stocks with high floating rate debt as a share of total debt outstanding with Sell ratings by Goldman Sachs equity research analysts include CL [Colgate-Palmolive], COL [Rockwell Collins], and JNJ [Johnson & Johnson].”

In fact, Goldman says that over the past year, when looking at its list of 50 companies spanning each sector in the S&P 500 with the highest share of floating-rate debt, you’ll find that the group has lagged the GS Financial Conditions index by 300 basis points as the companies struggle to keep up with higher interest rates.

So which companies have the highest share of floating rate debt?

Here are some of the most notable names on Goldman’s list.
  • Apple
  • eBay
  • MetLife
  • Coca-Cola
  • General Mills
  • Ford
  • McDonalds
  • General Motors
  • Time Warner
  • Chevron
  • Allergan
  • Johnson & Johnson
  • Monsanto

You’ll notice that a couple of companies made their way onto both lists, such as Apple.

As David Schawel, portfolio manager at Square 1 Bank, points out, it’s certainly possible for a company to have a strong balance sheet as well as a higher amount of floating-rate debt. “A company could have a terrible balance sheet and have floating debt, or could be swimming in cash like Apple and have it too,” he says.

— Check out Goldman: Recent Volatility Has Done Work of 3 Fed Hikes on ThinkAdvisor.

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