By Jacob Sonenshine

This time is a little different.

When the market rallies, investors usually want to own the riskiest stocks. But right now, the winning formula has changed: The best names to buy are good-quality companies that also have high potential for growth.

The S&P 500 is up 17% from the low point it hit in its nasty decline in April. Areas that lost the most when expectations about the economy soured have led the way, rebounding faster as the picture has brightened. The U.S. and China have agreed to temporarily reduce sky-high tariffs that were choking off trade between the countries, and the White House has indicated that deals with other countries are on the way.

That would mean reduced tariffs, less inflation, and more spending by consumers and businesses.

At this point, investors looking for stocks to buy at today's prices should avoid economically sensitive, riskier industries such as retail, restaurants, or financials. They are now a hair above their levels just before President Donald Trump unveiled surprisingly high tariffs against a wide range of countries in early April, meaning they are no longer reflecting much potential economic weakness.

Yet harder times are still a possibility. While Trump has partially rolled back tariffs, a 10% baseline tariff rate remains in place. Interest rates, all the while, have remained around 4%, where they have now hovered across various maturities for a few years . High rates take time to push consumer spending down, so that is a continuing source of pressure on consumers.

Economic growth is more likely to slow down than to significantly accelerate.

Given all that, strategists at UBS screened for higher-quality companies that can increase their earnings regardless, reasoning those stocks are likely to perform best as the economy adjusts to President Donald Trump's trade war.

The bank looked for companies with four qualities. They had to have a market capitalization of at least $10 billion, higher expected earnings growth than most publicly traded companies, and trade at forward price/earnings multiples closer to their historical averages than most stocks. Finally, companies had to be of higher "operational quality" than most businesses.

The latter means they have characteristics that enable them to consistently increase earnings. Those include pricing power -- the ability to lift prices without damaging demand -- and high profit margins, which insulate a company from losing money during recessions.

Stocks that make the cut can be expected to offer growth at a reasonable price, or GARP. UBS's screen yielded six names: Eli Lilly, the pharmaceutical company; Broadcom; Intuit, which owns TurboTax and QuickBooks; Cintas, which supplies uniforms and cleaning supplies to businesses; Heico, the dominant maker of aircraft parts; and Salesforce, the provider of cloud-based sales software.

Analysts expect sales at Salesforce to rise by just over 9% annually to $49.1 billion by 2027, according to FactSet. If the economy stumbles, some customers may scale back their investments in new cloud-based technologies as they watch their budgets, but any cuts are likely to be mild. Companies need the newest, fastest, and most cost efficient technologies to make the most of sales opportunities.

That is where Salesforce comes in. Its artificial intelligence agents give customers a reason to pay higher subscription prices for its software products, so its revenue growth is higher than for the average S&P 500 company.

If the company remains disciplined with costs, that would help profit margins increase, sending earnings per share up about 13% annually over the coming three years, according to FactSet. That compares with the 11% in growth in the aggregate earnings expected for companies in the S&P 500.

That kind of profit growth would likely push the stock higher because its price/earnings ratio isn't likely to drop much from its current level. Salesforce trades at about 25 times the earnings per share expected for the coming 12 months, about 14 points below its five-year average of about 39 times. The S&P 500 sells for 21 times, compared with the five-year average of 20 times.

Buy GARP stocks. They are just a better deal than the ones that are, well, the riskiest.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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May 13, 2025 15:28 ET (19:28 GMT)

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