If Tuesday's market decline is a sign of things to come, there are ways for investors to protect themselves and even profit from future declines without moving into cash. John Marshall of Goldman Sachs' derivatives research team said in a note to clients on Wednesday that investors can take a hit by buying put options on stocks that are likely to fall more than the broader market during an economic downturn. He said that it is possible to reduce the A put option gives an investor the right to sell a stock at a predetermined strike price, and the trade works when the stock price falls below that price. Goldman says these options could be relatively cheap for some of the more vulnerable stocks right now. “In normal market environments, options markets efficiently price options based on subsequent realized volatility. During market downturns, as fundamentals become more important, these quantitative methods “Our long-term research shows that free cash flow is the most important fundamental metric to look at when estimating downside asymmetry,” Marshall said in the note. Ta. To identify put option candidates, Goldman looked for stocks that were trading above the firm's target price and had low or negative free cash flow. “We think the puts on these stocks are attractive to buy on a downside,” Marshall said. One of his major companies on the list is Southwest Airlines. The airline industry requires significant capital investment, and Southwest Airlines' cash reserves fell by $200 million after last year's dividend payment. Still, the stock is up more than 50% since the beginning of November. LUV 6M Mountain Southwest Airlines stock has rebounded over the past four months. Another consumer stock that could face cash flow issues is Foot Locker. The company reported cash and cash equivalents of $187 million at the end of the third quarter, down more than 40% from the year-ago period. The list is not limited to loss-making startups, but also includes many technology companies. Chipmaker Intel, with a market capitalization of more than $180 billion, is one of the largest stocks on the list. The highly competitive semiconductor industry is also an area where companies are forced to make large capital investments. Cybersecurity company Cloudflare has also been cited as a stock to invest money in to stay ahead of its peers in a highly competitive industry. One of the smaller technology companies on the list is the education company Coursera. The company reported a net loss of $116.6 million in 2023, and its free cash flow was only $7.9 million. None of the stocks listed above have a Buy rating from Goldman Sachs analysts. Southwest stock has a neutral rating, but the other four stocks all have sell ratings. — CNBC's Michael Bloom contributed reporting
