Goldman Sachs says investors should use the options market to book outsize profits on these 16 dramatically underpriced stocks

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  • Goldman Sachs says investors are “fearful” but will grow optimistic as earnings season progresses.
  • Derivatives researcher Vishal Vivek suggests buying call options to profit when they do. 
  • He identified a group of “Buy” rated stocks that have struggled badly but could turn things around.

First-quarter earnings will get going over the next few days, and that means investors will have one more thing to pay attention to in a market that’s already nervous.

But Goldman Sachs Vice President for Derivatives Research Vishal Vivek says that investors who stay patient and keep their fear under control are going to be in great shape. He says investors have slashed their allocations to stocks in order to minimize risk, but earnings reports could quickly convince them to change their minds.

“Investors are fearful heading into earnings season,” he wrote in a recent client note. While overall market volatility has been calming down lately, the performance of various investing factors has grown more volatile as investors, especially hedge funds, reacted to an extremely complicated environment marked by continued growth on one hand but fears about inflation, rising interest rates, and war on the other.

So implied volatility in the market is high, but Vivek thinks good news is on the way as earnings and forward guidance announcements entice investors to “re-risk.” He’s encouraging investors to get ahead of that trade by purchasing cheap call options before quarterly reports start pouring in.

“We believe higher flows into stocks which have underperformed over the course of this factor rotation will be a tail-wind for performance, as company-level fundamentals take precedence over positioning and the macro,” he wrote. “We recommend buying call options on these stocks to position for a reversion in performance.”

Vivek and his team focused on companies that have substantially underperformed the S&P 500 so far this year, that are rated “Buy” by Goldman’s analysts, and that score highly among growth or value stocks according to the firm’s metrics.

The idea behind the strategy is that investors can simultaneously diversify their portfolios and improve their odds of investing in a winner by buying low-cost options for multiple stocks instead of just investing in a few of them. If an investor buys the option and the stock rallies enough to reach the option’s strike price, they can then exercise the option and buy the stock.

The risk is that these options are short term and expire in two to three months. If the stock doesn’t reach the strike price, the option expires and the investor loses the amount of money they spent on the options.

Below are 16 buy-rated growth and value stocks that have performed poorly in the first quarter, according to Goldman. They are ranked from lowest to highest based on their performance relative to the S&P 500 as of April 12. Options prices were also accurate as of that date.