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One stock-trading strategy has quietly been crushing the market — and Goldman Sachs says it's just getting started

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  • As the stock market has been whipsawed by factors such as trade tensions and central-bank tightening, one trading strategy has quietly outperformed.
  • Goldman Sachs' 2018 market outlook suggests the trade will continue to excel throughout the rest of the year.

Given how choppy the US stock market has been this year, it has proved difficult for traders to find a strategy that has outperformed through thick and thin.

But Goldman Sachs thinks it has found an ace in the hole.

As traders have stressed themselves out analyzing the winners and losers of such timely issues as a looming trade war and central-bank tightening, Goldman is looking somewhere else entirely: the merger-and-acquisition market. Most notably, the companies with the highest likelihood of getting bought.

After all, a Goldman-curated index of stocks with at least a 15% chance of being acquired in the next 12 months has beaten the benchmark S&P 500 by 4 percentage points since the start of the year. This is reflected by the sharp increase seen in the gray line in the chart.

4 23 18 m&a COTD

It's worth noting that stocks with other positive characteristics — such as capital expenditure and research-and-development growth — have outperformed over a longer time frame. Still, on a year-to-date basis, they've been unable to hold a candle to the appreciation seen in possible M&A targets.

That has largely been because of the record pace of deals in the US, totaling $473 billion in the first quarter, a 66% year-over-year increase and the fastest start to a year on record. Goldman now sees 2018 as "on track to be one of the most active years for large M&A in recent history."

That means the picture around the firm's stock strategy of identifying M&A targets should stay favorable going forward. So if you're going to start using it, there's still time to get involved.

"Continued growth in M&A activity should support the performance of the basket and lift the relative P/E premium toward its high of 55% in 2013," David Kostin, Goldman's chief US equity strategist, wrote in a client note.

SEE ALSO: The stock market's 'secret medication for longevity' has vanished — and that leaves it highly vulnerable to a meltdown

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