March 16, 2017

Quantamentals:
The Quality Factor
Equity Research

Time to Step into Integrated

Consistent Outperformance but not 2016 Jessica Binder Graham, CFA

Our Integrated (aka Quality) Factor a composite of Growth, Returns and (212) 902-7693 jessica.graham@gs.com
Goldman, Sachs & Co.
Value has delivered the best risk adjusted returns vs. our broader factor
suite over the last decade. This has been driven by strong performance as
well as lower volatility. Furthermore, we see a compelling entry point as Ronny Scardino
Integrated now trades at one of the most attractive valuation levels vs. the (212) 357-3775 ronny.scardino@gs.com
past five years. See inside for the stocks currently in the top / bottom quintile Goldman, Sachs & Co.
relative to their sectors.
Deep Mehta
Valuation Disconnect: Quality on Sale? (212) 357-8419 deep.mehta@gs.com
Goldman, Sachs & Co.
Our long-short Integrated factor is trading 2.1 standard deviations below its
historical average, the largest disconnects of any of the factors that we
track and near the largest discounts compared to the past five years. Ujjwal Kumar
Drilling down into the tails, we find stocks with low scores (the short leg of (646) 446-8697 ujjwal.kumar@gs.com
the trade) is trading at a largest premium vs. history (21.5%) while stocks Goldman Sachs India SPL
with high scores (long leg) are at a more modest premium (5.5%).

HOW INTEGRATED IS CALCULATED

Factor Diversification: The Academic View The Goldman Sachs Investment Profile (IP) provides
investment context for a security and leverages our analysts
Academic literature supports that combining multiple factors can improve forward-looking estimates.
risk-adjusted returns. In addition, there are benefits of implementing on an Integrated is a composite metric that is a simple average of
Growth, Returns and Value scores. We bucket companies
individual security level vs. aggregating individual factor portfolios. We find into the highest quintile (Q1 or top 20%) and lowest quintile
Integrated has better performance and risk-adjusted returns than a simple (Q5/lowest 20%) within each coverage sector.
Growth, Valuation and Returns are based on the following:
average of its constituent pieces (Growth, Value, Returns).
Growth: an average of sales, EBITDA and EPS growth
Integrated has had the best risk-adjusted performance across our factors (Financials: only sales and EPS growth are included).

all metrics since Inception (Sept 2006-March 2017) Valuation: an average of P/E, P/B, dividend yield, EV/FCF,
EV/EBITDA and EV/DACF (Financials: only P/E, P/B and
2.0 dividend yield are included).
1.6
Information Ratio

1.5 Returns: an average of a companys Return on Equity

1.0 (ROE), Return on Capital Employed (ROCE) and Cash Return
1.0 on Cash Invested (Financials: only ROE is included).

0.5 0.3 For further details on methodology see page 10.

0.2
0.1
0.0

-0.5 -0.3 -0.4

Integrated Valuation Growth Balance Sheet Returns Volatility Size
(High vs (Cheap vs (High vs (Strong vs (High vs (Low vs (Large vs
Low) Rich) Low) Weak) Low) High) Small)

Perf (Annual.) 8% 6% 2% 1% 1% -5% -4%

Vol (Annual.) 5% 6% 6% 7% 9% 16% 11%

Source: Goldman Sachs Global Investment Research.

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors
should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors
should consider this report as only a single factor in making their investment decision. For Reg AC certification and other
important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by
non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

The Goldman Sachs Group, Inc. Global Investment Research

 March 16, 2017 Quantamentals: The Quality Factor

The Quality Factor

The Integrated (aka Quality) Factor, which is a composite of Growth, Returns
and Value, has delivered the best cumulative performance across our GS
Investment Profile (IP) factor suite since 2006 with significantly lower volatility.
We see an attractive entry point for investors seeking quality, as the factor now
Our analysis of quantitative
trades at one of the most attractive valuation levels vs. the past five years.
and fundamental strategies
from a factor, technical and Its been over a year since Factormageddon1 galvanized fundamental investors to increase
style perspective. Visit our their factor awareness. Since that time, it is clear that many have expanded their
portal to explore the full
sophistication when it comes to monitoring factors as well as using factors for risk
series.
management purposes and/or taking tactical view. As investors continue to expand their
Factor Review and Outlook: toolbox we highlight our Integrated Strategy as a proxy for quality, given it strong
The Value Trade, Momentum
performance track record at lower volatility. As a reminder, we take a simple average of
& Crowding, Jan 4, 2017
three dimensions: Valuation, Growth and Returns. In our view, it is the diversification
Quantamental Theory: The benefit of this multi-factor approach that contributes to this attractive risk profile.
Seasons & Reasons of Factor
Performance, July 13, 2016
Consistent Performance at the Lowest Volatility. Integrated has delivered the strongest
performance since inception and has posted positive returns in 9 of the last 10 years. It has
Quantamental 101- Factor also exhibited the lowest annualized volatility. Consequently, it has the best Information
Investing: The Rise of the Ratio (IR) across our factor suite (Exhibit 1). On a rolling 12M basis, it has shown a positive
Machines II, March 14, 2016 Information Ratio over 98% of the time and a level above 1 just over 50% of the time.

ETFs: The Rise of the

Machines, April 10, 2015
1
See Quantamental 101- Factor Investing: The Rise of the Machines II, March 14, 2016.

Exhibit 1: Consistent Performance + Low Volatility = Best Risk Adjusted Alpha

Information Ratio, Performance (Total Return) and Volatility (Standard Deviation) for GS Investment Profile (IP) Factors
Since
Inception 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
(Sept '06)*
Information Ratio Shading denotes Information Ratio >1
Integrated (High vs Low) 1.6 3.1 0.4 1.4 0.7 1.1 0.8 0.0 2.7 1.8 0.1
Valuation (Cheap vs Rich) 1.0 -1.2 0.4 2.7 0.3 0.1 0.6 1.4 2.4 0.7 1.6
Growth (High vs Low) 0.3 1.7 -1.9 2.5 1.7 -0.7 0.4 0.0 -0.9 0.3 0.1
Returns (High vs Low) 0.1 3.6 0.7 -1.5 -1.1 0.7 -0.6 -0.7 1.6 2.2 -1.3
Balance Sheet (Strong vs Weak) 0.2 3.0 1.0 -1.6 1.9 0.8 -1.2 -0.7 0.5 1.9 -0.9
Size (Large vs Small) -0.4 1.9 0.3 -1.9 -1.7 0.0 -1.0 -1.4 1.8 1.5 -1.4
Volatility (Low vs High) -0.3 0.1 0.8 -1.8 -1.2 0.5 -0.6 -1.0 1.0 1.7 -0.9

Performance (Total Return) Shading denotes best and worst performing fundamental factor
Integrated (High vs Low) 8% 12% 4% 9% 3% 4% 4% 0% 11% 8% 1%
Valuation (Cheap vs Rich) 6% -7% 4% 21% 1% 0% 3% 6% 14% 3% 9%
Growth (High vs Low) 2% 9% -15% 19% 8% -4% 2% 0% -6% 1% 1%
Returns (High vs Low) 1% 17% 10% -22% -7% 5% -3% -3% 8% 16% -14%
Balance Sheet (Strong vs Weak) 1% 12% 13% -20% 7% 4% -5% -3% 2% 12% -8%
Size (Large vs Small) -4% 13% 4% -33% -15% 0% -7% -8% 15% 14% -21%
Volatility (Low vs High) -5% 0% 20% -50% -16% 8% -7% -7% 10% 18% -18%

Volatility (Standard Deviation) Shading denotes fundamental factor with the lowest/highest vol in any given year
Integrated (High vs Low) 5% 4% 9% 7% 4% 4% 5% 3% 4% 4% 5%
Valuation (Cheap vs Rich) 6% 6% 11% 8% 5% 6% 6% 4% 6% 5% 5%
Growth (High vs Low) 6% 5% 8% 8% 5% 5% 6% 4% 6% 4% 6%
Returns (High vs Low) 9% 5% 14% 15% 6% 7% 6% 4% 5% 7% 11%
Balance Sheet (Strong vs Weak) 7% 4% 13% 12% 4% 4% 4% 4% 4% 6% 9%
Size (Large vs Small) 11% 7% 15% 17% 9% 11% 7% 6% 8% 10% 16%
Volatility (Low vs High) 16% 7% 27% 27% 13% 16% 10% 7% 10% 11% 20%
Note: (1) * since inception has been annualized and is through March 14, 2017, (2) All performance figures are based on our proprietary Investment Profile framework, which ranks and
normalizes our analyst estimates into specific style buckets. Companies are grouped into highest quintile (Q1 or top 20%) as Buys and lowest quintiles (Q5 or bottom 20%) as Sells in each
coverage sector and performance is equal-weighted. The performance of the combined market neutral strategies will not necessarily equal the difference between their two component tails
because of the effects of rebalancing. The combined strategies are reweighted on a weekly basis to maintain a market-neutral position. (3) We calculate perf and std deviation on an annualized
basis, with the latter based on daily total returns over a trailing 12-m period, (4) In the case of our market-neutral factor model, the short leg acts as the benchmark when calculating the IR.

Source: Goldman Sachs Global Investment Research.

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March 16, 2017 Quantamentals: The Quality Factor

Digging into 2016 Performance

Aside from Value, few factors generated positive alpha in 2016 and factor volatility was
elevated for a good part of the year. This resulted in low/negative information ratios for
most factors we track. Integrated did finish in positive territory (+1%) though performance
paled vs. recent history (11% and 8% in 2014 and 2015, respectively) and was the second
worst year in the last decade. We highlight the following explanations:

While Integrated is an equally weighted average of Growth, Value and Returns

metrics, we find that over time it has been consistently the most correlated with
Returns (as Growth / Value scores tend to provide opposite signals). In addition,
there is outsized overlap between the two. See Exhibit 2 and 3. Given the dramatic
pullback in Returns in 2016 (down 14% for the year), it is perhaps unsurprising
Integrated did not fare that well.

From a sector perceptive, Industrials, Health Care and Financials detracted from
the headline performance. See Exhibit 4. We note that in years when Integrated
fares well, it tends to be consistent across the majority of sectors (78% in 2011,
2012 and 2014; 56% in 2015). See Exhibit 5.

Exhibit 2: Performance has been most correlated w/ Returns Exhibit 3: and there is significant overlap between names
3m rolling correlation based on daily price changes % of names also in Q1/Q5 Growth, Returns, Value
100% 65%

80% 60%
Factor Constituent Overlap (%)

60% 55%

50%
3 month Correlation

40%
45%
20%
40%
0%
35%
-20%
30%
-40%
Integrated Correl with Growth 25%
-60% Integrated Correl with Returns
Integrated Correl with Valuation
-80% Integrated & Growth (Q1) Integrated & Growth (Q5)
Integrated & Valuation (Q1) Integrated & Valuation (Q5)
Integrated & Returns (Q1) Integrated & Returns (Q5)

Source: Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research. As of 3/13/2017.

Exhibit 4: Energy and Industrials drove 2016 performance Exhibit 5: Integrated Performance by GICS sector
2016 attribution weighted by GICS Sector; sorted by Q1 vs. Q5 Sorted by 2016

7%
High Integrated Low Integrated GICS Sector 2011* 2012 2013 2014 2015 2016
6% outperformed Low outperformed High
Materials 11% 9% 2% 0% 1% 30%
5%
Energy 9% 37% 8% 34% 21% 18%
4%
Cons Disc. 0% -15% 6% 9% -7% 6%
3%
Info Tech 9% 7% -3% 19% 13% 0%
2%
Cons Staples 1% 27% -29% 0% -7% -1%
1%
Financials 1% 4% -1% -3% -3% -5%
0%
Utilities -10% 5% -4% 2% -8% -12%
-1%
Industrials -11% -3% 7% 14% 18% -14%
Energy Cons Disc Materials Info Tech Cons Utilities Financials Health Industrials
Staples Care Health Care 8% 9% -7% 8% 12% -16%
Q1 Integrated (High Scores) Q5 Integrated (Low Scores)

Note: Telecom and Real Estate have been excluded given small sector size (by # of Sectors with + Alpha 78% 78% 44% 78% 56% 33%
number of names) and limited history, respectively. Note: * 2011 begins on March 28, 2011.

Source: Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research.

Note: because our factor model is based on GS-defined conviction sectors and not GICS, the number of companies in each
GICS sector will vary by quintile whereas there are equal numbers in Q1/Q5 in our model. Therefore, GICS level attribution
will not add up to overall factor performance. Nonetheless, we find the GICS level aggregation a useful tool in giving
investors a sense as to what sectors are driving overall factor performance.

Goldman Sachs Global Investment Research 3

March 16, 2017 Quantamentals: The Quality Factor

Quality on Sale?
In our view, factor valuation is a useful gauge of investor sentiment and crowdedness. See
Factor Review and Outlook, The Value Trade, Momentum and Crowding, Jan 4, 2017 for
more details.

With the market trading at near all-time highs, it is not surprising that most factor tails (the
individual Q1s and Q5s) are trading above their historical averages.

However, what is notable is that (1) High Integrated is one of the least expensive factors
(trading at just a 5.5% premium to its 5yr median) while Low Integrated is one of the most
expensive (21.5% premium) when compared against other factors and (2) as a result, the
ratio between the two is at one of the lowest points over the last five years and is the
biggest disconnects of any of the market-neutral factors that we track. See Exhibit 6-7.

Exhibit 6: Integrated is near the cheapest levels since 2012 Exhibit 7: and is more than 2 std deviations below average
Ratio of Forward P/E (Q1 / Q5) Long / Short Factor Valuation
1.0
Forward P/E Current # of St Dev
5yr
Factor (Long/ vs 5yr Above/
Avg.
Short Ratio) Avg. Below Avg.
Ratio of Q1/Q5 Forward P/E

0.9 Valuation (Cheapest vs. Richest) 0.6 0.5 16% 2.1

Volatility (Low vs. High) 1.2 0.9 23% 1.9

0.8
Size (Large vs. Small) 1.0 0.9 12% 1.4

Short Interest (Low vs. High) 0.9 0.9 9% 1.0

Growth (High vs. Low) 1.6 1.5 1% 0.1

0.7
Balance Sheet (Strong vs. Weak) 1.1 1.1 0% 0.0

Returns (High vs. Low) 0.8 0.9 -9% -1.1

0.6 Momentum (Leaders vs. Laggards) 1.0 1.2 -16% -1.3
2012 2013 2014 2015 2016 2017
Integrated Valuation Integrated (High vs. Low) 0.7 0.8 -14% -2.1

Source: I/B/E/S, Goldman Sachs Global Investment Research. Source: I/B/E/S, Goldman Sachs Global Investment Research

Exhibit 8: Integrated Q5 (low scores) is trading at a large valuation premium vs. history. The Q1 premium is more modest
Forward P/E Valuation Factors, sorted by difference between current and 5yr median P/E
Current 5-year Median 5-year Range
25 35
30
Forward P/E
15 20 10

Expensive Least Expensive

vs. History vs. History
5

High Volatility
Rich Valuation
Performance Laggards (6m)

Low Integrated

Rich EV/FCF

Performance Leaders (6m)

Strong Balance Sheets
Low Volatility

Low Returns

High Returns
Low ROE
Low Short Interest

Low ROCE

Cheap P/B

Cheap P/E

Low EPS Growth

Rich P/E

Rich P/B
Cheap Valuation

High Growth

Large Size

High CROCI

High Sales Growth

Low Sales Growth

High Short Interest

Small Size

Rich EV/EBITDA
Low Dividend Yield

High Dividend Yield

High EBITDA Growth

Rich EV/DACF

High Integrated
Cheap EV/DACF

Cheap EV/FCF

Cheap EV/EBITDA

Weak Balance Sheets

High ROE

High ROCE
High EPS Growth

Low Growth

Low EBITDA Growth

Low CROCI

Source: I/B/E/S, Goldman Sachs Global Investment Research.

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March 16, 2017 Quantamentals: The Quality Factor

Case Study: Integrated During Factormaggedon

Factor Volatility and Market Drawdowns: Weathering the Storm
While Integrated performance was muted in 2016, it did continue to post below-average
volatility. As a case study we turn to the most recent episode of significant factor rotation
in early 2016 (e.g. Factormageddon). The 2 week period starting February 23, 2016 saw a
5+ standard deviation move1 for a number of our factors. However, over this time frame,
Integrated moved less than 1 standard deviation.

One of the reasons for this is the Value input limits the potential to overpay for one of
the other two metrics and therefore is less at risk for a reversal. In addition, we find
Integrated tends to have less macro sensitivity than many of the other factors that we track.
Below we revisit the interplay between our IP factors and macro variables (e.g.
US/European/China Growth, US/Euro FCI, Oil Price and Inflation Expectations) and find that
only about 5% of Integrated performance can be explained by changes in the macro. For
more details see Quantamental Theory: Seasons and Reasons, July 13, 2016.

Exhibit 9: Factor performance and volatility during Exhibit 10: Integrated has the least macro sensitivity
Factormageddon among factors
# of std deviations based on 2 week performance as of 3/8/16 % of performance explained by changes in macro variables
vs. past 5 yrs; factor performance over 2 weeks ending 3/8/16
15% 60%
Factor vs Macro Variable R-squared

At least 35% of
our technical
10% P/B 50% factor perf can be
explained by
macro variables...
Factor Performance (%)

5% 40%
EV/DACF
Valuation
0% 30%
Integrated ...which compares to
Growth just 5% for our
-5% Short Integrated Strategy
P/E Sales Interest Returns 20%
Growth
Leverage CROCI
-10% 10%
ROE
ROCE
-15% Momentum 0%
Volatility
-20%
0 sd 1 sd 2 sd 3 sd 4 sd 5 sd 6 sd 7 sd 8 sd 9 sd

# of Standard Deviations

Source: Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research.

1
Note this assumes a normal distribution, which is unlikely a realistic assumption for equity prices.

Goldman Sachs Global Investment Research 5

March 16, 2017 Quantamentals: The Quality Factor

A Multi-Factor Approach vs. Factor Diversification

There are numerous academic papers espousing the benefits of factor diversification which typically drive improved
risk-adjusted returns. Much of this benefit stems from the fact that correlations between factors are less than one, and in
some cases, such as Momentum and Value, are negative2.

However, recent industry debate has been around whether a diversified factor approach is best implemented by
combining individual factor portfolios or by combining factors at the single-security level (similar to our Integrated
factor discussed in this report) which has been shown to generate stronger performance with lower volatility than
combining multiple factor strategies.3,4

By comparing Integrated to a simple weighted average of its three constituent factors (Returns, Growth and Value), we
find that the multi-factor approach produces significantly stronger returns since inception (84% vs. 31%) and
consistently outperforms in all but one year (2013). In addition, Integrated produces a better risk-adjusted return (as
gauged by the information ratio) despite the average of Growth, Value and Returns showing lower volatility. This is due
to the dampening effect of the consistently negative correlation between Value and Growth (see Exhibit 12).

Exhibit 11: Integrated has outperformed Fundamental Exhibit 12: and has had stronger performance and
Factors by 53% since inception in 2006 risk-adjusted returns despite slightly higher volatility
Performance of Fundamental Factors vs Integrated Factor Annual. Information Ratio, Perf & Vol Since Inception
1.9
10% Integrated 1.8
+84%
1.8 Growth, Value, Returns Avg
9% 1.6
Performance (Index: Sept 2006)

1.7
8% 1.4
1.6
7%
1.2
1.5
6%
1.4 1.0
5%
1.3 +31% 0.8
4%
1.2 0.6
3%
1.1 0.4
2%
1.0
1% 0.2

0% 0.0
Fundamental Factors (Avg of Returns, Growth, Value) Perf Volatility Information
Integrated Factor (Ann.) (Ann.) Ratio (RHS)

Source: Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research.

2
Asness, C.S., Moskowitz, T.J. and Pedersen, L.H. (2013), Value and Momentum Everywhere. The Journal of
Finance, 68: 929985. DOI:10.1111/jofi.12021. https://eorder.sheridan.com/3_0/app/orders/4482/files/assets/basic-
html/page-929.html#
3
Bender, Jennifer and Wang, Taie, Can the Whole Be More Than the Sum of the Parts? Bottom-Up versus Top-
Down Multifactor Portfolio Construction. The Journal of Portfolio Management, Vol 42, No. 5 (May 2016).
4
Clarke, Roger G and de Silva, Harindra and Thorley, Steven, Fundamentals of Efficient Factor Investing (October 11,
2016). Financial Analysts Journal, Vol. 72, No. 6 (2016). http://www.cfapubs.org/doi/pdf/10.2469/faj.v72.n6.3

Goldman Sachs Global Investment Research 6

March 16, 2017 Quantamentals: The Quality Factor

Integrated Factor Constituents

Below we highlight the Q1 and Q5 constituents as of March 14, 2017.

Exhibit 13: Companies in the Top Quintile (Q1)

Ticker Company Name Rating Ticker Company Name Rating Ticker Company Name Rating
A Agilent Technologies Inc. Buy* FDS FactSet Research Systems Inc. Sell NEP NextEra Energy Partners Buy
AAPL Apple Inc. Buy FFIV F5 Networks Inc. Neutral NFX Newfield Exploration Co. Neutral
ABBV AbbVie Inc. Buy* FLEX Flex Buy NICE NICE Ltd. Neutral
ACIA Acacia Communications Inc. Neutral FLIR FLIR Systems Inc. Buy NOC Northrop Grumman Corp. Buy*
ACN Accenture Plc Neutral FLR Fluor Corp. Neutral NOW ServiceNow Inc. Neutral
ACOR Acorda Therapeutics Inc. Neutral FMSA Fairmount Santrol Holdings Neutral NYLD__A NRG Yield Inc. Buy
ADS Alliance Data Systems Corp. Neutral FNSR Finisar Corp. Buy OHI Omega Healthcare Investors Inc. Neutral
ALDW Alon USA Partners Neutral FTI TechnipFMC Plc Buy ON ON Semiconductor Corp. Buy
AMCX AMC Networks Inc. Buy GILD Gilead Sciences Inc. Neutral ORCL Oracle Corp. Buy*
APLP Archrock Partners Buy GLBL TerraForm Global Inc. Neutral OXY Occidental Petroleum Corp. Neutral
APO Apollo Global Management LLC Buy GOOGL Alphabet Inc. Buy* PBPB Potbelly Corp. Neutral
AR Antero Resources Corp. Neutral GPK Graphic Packaging Holding Buy PCAR Paccar Inc. Neutral
ARES Ares Management LP Neutral GPOR Gulfport Energy Corp. Buy PCLN Priceline.com Inc. Neutral
ARRS ARRIS International Plc Buy GT Goodyear Tire & Rubber Co. Buy PM Philip Morris International Inc. Buy
AVGO Broadcom Ltd. Buy GWPH GW Pharmaceuticals Plc Buy PMTS CPI Card Group Neutral
BG Bunge Buy HAL Halliburton Co. Buy POR Portland General Electric Co. Sell
BIIB Biogen Inc. Neutral HD Home Depot Inc. Neutral PRTY Party City Holdco Inc. Neutral
BIVV Bioverativ Inc. Neutral HEP Holly Energy Partners Neutral PRXL Parexel International Corp. Sell
BKU BankUnited Inc. Sell HF HFF Inc. Neutral PSXP Phillips 66 Partners Sell
BX Blackstone Group Buy HP Helmerich & Payne Inc. Neutral PYPL PayPal Holdings Buy*
CAR Avis Budget Group Neutral HRS Harris Corp. Buy QSR.TO Restaurant Brands Intl Inc. Neutral
CBG CBRE Group Buy ICLR ICON Plc Buy RCL Royal Caribbean Cruises Ltd. Sell
CBI Chicago Bridge & Iron Neutral INCR INC Research Holdings Buy REVG REV Group Neutral
CC Chemours Buy INCY Incyte Corp. Buy RLGY Realogy Holdings Neutral
CCL Carnival Corp. Neutral INTU Intuit Inc. Buy* ROK Rockwell Automation Inc. Neutral
CCOI Cogent Communications Holdings Neutral IP International Paper Co. Neutral ROST Ross Stores Inc. Neutral
CCP Care Capital Properties Inc. Neutral IPG Interpublic Group of Co. Neutral SABR Sabre Corp. Buy
CE Celanese Corp. Buy ITT ITT Inc. Buy SAFM Sanderson Farms Inc. Sell
CG Carlyle Group Neutral JAG Jagged Peak Energy Inc. Buy SBUX Starbucks Corp. Buy*
CL Colgate-Palmolive Co. Neutral JCI Johnson Controls International Plc Neutral SEE Sealed Air Corp. Buy*
CLH Clean Harbors Inc. Neutral JELD JELD-WEN Holding Neutral SF Stifel Financial Corp. Buy
CMCSA Comcast Corp. Buy JLL Jones Lang LaSalle Inc. Buy SGRY Surgery Partners Inc. Neutral
CNK Cinemark Holdings Buy* JNJ Johnson & Johnson Neutral SIRI Sirius XM Holdings Neutral
COLM Columbia Sportswear Co. Buy* JNPR Juniper Networks Inc. Buy* SMLP Summit Midstream Partners Neutral
COTV Cotiviti Holdings Neutral KAR KAR Auction Services Inc. Neutral SPR Spirit AeroSystems Holdings Sell
CPN Calpine Corp. Buy KATE Kate Spade & Co. Neutral SPWH Sportsman's Warehouse Holdings Buy
CPS Cooper-Standard Holdings Buy KMB Kimberly-Clark Corp. Buy STE Steris Plc Neutral
CQH Cheniere Energy Partners Holdings Neutral KMT Kennametal Inc. Buy STOR STORE Capital Buy*
CQP Cheniere Energy Partners Neutral KORS Michael Kors Holdings Neutral STX Seagate Technology Neutral
CRTO Criteo SA Buy LB L Brands Inc. Buy SWK Stanley Black & Decker Inc. Neutral
CRZO Carrizo Oil & Gas Inc. Neutral LH Laboratory Corp. of America Holdings Neutral SWKS Skyworks Solutions Inc. Neutral
CSTM Constellium Neutral LLY Eli Lilly & Co. Buy* SWN Southwestern Energy Co. Neutral
CTSH Cognizant Technology Solutions Neutral LOW Lowe's Cos. Buy SYF Synchrony Financial Buy*
CVRR CVR Refining LP Neutral LPLA LPL Financial Holdings Neutral TCP TC PipeLines LP Neutral
CYBR CyberArk Neutral LRCX Lam Research Corp. Buy* TMUS T-Mobile US Inc. Buy
DF Dean Foods Co. Neutral LYB LyondellBasell Industries Neutral TSE Trinseo SA Neutral
DFS Discover Financial Services Buy MAR Marriott International Buy* TXRH Texas Roadhouse Inc. Neutral
DGC.TO Detour Gold Corp. Buy MAS Masco Corp. Buy UAN CVR Partners Neutral
DGX Quest Diagnostics Inc. Buy* MCK McKesson Corp. Neutral ULTA Ulta Beauty Inc. Neutral
DISCA Discovery Communications Inc. Sell MMI Marcus & Millichap Inc. Neutral ULTI Ultimate Software Group Neutral
DKS Dick's Sporting Goods Buy MNST Monster Beverage Corp. Buy* V Visa Inc. Buy*
DNB Dun & Bradstreet Corp. Neutral MPC Marathon Petroleum Corp. Buy VEEV Veeva Systems Inc. Neutral
DYN Dynegy Inc. Neutral MPLX MPLX LP Buy VIRT Virtu Financial Inc. Buy
EAT Brinker International Neutral MPW Medical Properties Trust Inc. Neutral VLO Valero Energy Corp. Buy
EBAY eBay Inc. Buy MS Morgan Stanley & Co. Neutral VVV Valvoline Inc. Neutral
EL Estee Lauder Co. Neutral MSFT Microsoft Corp. Buy WHR Whirlpool Corp. Neutral
EVA Enviva Partners LP Neutral MTCH Match Group Sell WSM Williams-Sonoma Inc. Buy
EXP Eagle Materials Inc. Neutral MWA Mueller Water Products Inc. Buy WYN Wyndham Worldwide Corp. Neutral
FCX Freeport-McMoRan Inc. Neutral NBR Nabors Industries Ltd. Buy* YRI.TO Yamana Gold Inc. Sell

Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 7

March 16, 2017 Quantamentals: The Quality Factor

Exhibit 14: Companies in the Bottom Quintile (Q5)

Ticker Company Name Rating Ticker Company Name Rating Ticker Company Name Rating
AB AllianceBernstein Holding Neutral FHB First Hawaiian Inc. Neutral PLD Prologis Inc. Sell
ACC American Campus Communities Inc. Sell FIS Fidelity National Information Services Buy POT Potash Corp. of Saskatchewan Inc. Neutral
ADI Analog Devices Inc. Neutral FLS Flowserve Corp. Neutral PSTG Pure Storage Inc. Neutral
ADM Archer-Daniels-Midland Neutral FMI Foundation Medicine Inc. Neutral PTLA Portola Pharmaceuticals Inc. Neutral
ADSK Autodesk Inc. Buy FNV.TO Franco-Nevada Corp. Neutral RAD Rite Aid Corp. Neutral
ADTN ADTRAN Inc. Sell FSLR First Solar Inc. Neutral RDC Rowan Cos. Neutral
AEM.TO Agnico Eagle Mines Ltd. Neutral FTR Frontier Communications Corp. Neutral RIG Transocean Ltd. Sell
AIV Apartment Investment & Management Neutral GD General Dynamics Corp. Neutral ROLL RBC Bearings Inc. Neutral
ALB Albemarle Corp. Buy* GGP GGP Inc. Neutral ROP Roper Technologies Inc. Neutral
AMC AMC Entertainment Holdings Neutral GHL Greenhill & Co. Sell RSG Republic Services Inc. Neutral
AN AutoNation Inc. Neutral GNC GNC Holdings Sell RSPP RSP Permian Inc. Neutral
APH Amphenol Corp. Buy GNRC Generac Holdings Neutral RUN Sunrun Inc. Buy
APTI Apptio Inc. Neutral GPI Group 1 Automotive Inc. Sell RXN Rexnord Corp. Sell
ARNC Arconic Inc. Sell GPN Global Payments Inc. Buy SAM Boston Beer Co. Neutral
ASNA Ascena Retail Group Neutral GPRO GoPro Inc. Sell SCWX SecureWorks Corp. Buy
ATO Atmos Energy Corp. Neutral H Hyatt Hotels Corp. Neutral SJM J. M. Smucker Co. Sell
AWK American Water Works Neutral HIVE Aerohive Networks Inc. Neutral SLG SL Green Realty Corp. Neutral
BBD__B.TO Bombardier Inc. Neutral HLI Houlihan Lokey Inc. Neutral SQ Square Inc. Buy
BBRY BlackBerry Ltd. Sell HMHC Houghton Mifflin Harcourt Corp. Buy SRCL Stericycle Inc. Neutral
BBT BB&T Corp. Neutral HRI Herc Holdings Neutral SRE Sempra Energy Neutral
BEN Franklin Resources Inc. Sell HSE.TO Husky Energy Inc. Buy SWC Stillwater Mining Co. Neutral
BMS Bemis Co. Neutral HST Host Hotels & Resorts Inc. Sell TAP Molson Coors Brewing Co. Buy
BNFT Benefitfocus Inc. Neutral HUBS HubSpot Inc. Neutral TCS Container Store Group Neutral
BPMC Blueprint Medicines Corp. Buy ICE IntercontinentalExchange Inc. Buy* TEL TE Connectivity Ltd. Sell
BURL Burlington Stores Inc. Buy IMAX IMAX Corp. Neutral TEX Terex Corp. Buy
CCI Crown Castle International Corp. Buy* INFN Infinera Corp. Neutral TIF Tiffany & Co. Neutral
CEQP Crestwood Equity Partners Buy INGR Ingredion Inc. Sell TRI Thomson Reuters Corp. Neutral
CFX Colfax Corp. Neutral IONS Ionis Pharmaceuticals Inc. Sell TRP.TO TransCanada Corp. Buy
CLMT Calumet Specialty Products Partners Neutral IRWD Ironwood Pharmaceuticals Inc. Neutral TRS TriMas Corp. Neutral
CLVS Clovis Oncology Inc. Neutral JACK Jack in the Box Inc. Sell TRUE TrueCar Neutral
CME CME Group Neutral JUNO Juno Therapeutics Inc. Neutral TSLA Tesla Inc. Sell
CRC California Resources Corp. Sell KHC Kraft Heinz Co. Buy* TTOO T2 Biosystems Inc. Neutral
CREE Cree Inc. Sell KLAC KLA-Tencor Corp. Buy TWLO Twilio Neutral
CSLT Castlight Health Inc. Neutral KMI Kinder Morgan Inc. Buy TWOU 2U Inc. Buy
CVE Cenovus Energy Inc. Sell KO Coca-Cola Co. Sell TXMD TherapeuticsMD Inc. Buy
DDR DDR Corp. Neutral LAMR Lamar Advertising Co. Buy TXN Texas Instruments Inc. Sell
DHR Danaher Corp. Neutral LC LendingClub Corp. Neutral UAA Under Armour Inc. Neutral
DISH DISH Network Corp. Buy LGF__A Lions Gate Entertainment Corp. Neutral UFS Domtar Corp. Neutral
DK Delek US Holdings Neutral LL Lumber Liquidators Holdings Sell UNIT Uniti Group Inc. Neutral
DMTX Dimension Therapeutics Neutral LQ La Quinta Holdings Sell UNVR Univar Inc. Buy
DNKN Dunkin' Brands Group Neutral MAC Macerich Co. Neutral URBN Urban Outfitters Inc. Sell
DNR Denbury Resources Inc. Sell MCD McDonald's Corp. Neutral UTX United Technologies Corp. Neutral
DO Diamond Offshore Drilling Sell MCRB Seres Therapeutics Inc. Neutral VSI Vitamin Shoppe Inc. Sell
DVA DaVita Inc. Sell MIK Michaels Cos. Neutral W Wayfair Inc. Neutral
DVN Devon Energy Corp. Neutral MOBL MobileIron Inc. Neutral WAB Wabtec Corp. Neutral
ECL Ecolab Inc. Sell MRVL Marvell Technology Group Neutral WEC WEC Energy Group Neutral
EIGI Endurance International Group Sell MTB M&T Bank Corp. Neutral WEN The Wendy's Co. Neutral
EPC Edgewell Personal Care Neutral MTW Manitowoc Co. Neutral WEX WEX Inc. Neutral
EQGP EQT GP Holdings Neutral MUR Murphy Oil Corp. Sell WFC Wells Fargo & Co. Buy
EQR Equity Residential Sell MYCC ClubCorp Holdings Neutral WFM Whole Foods Market Inc. Sell
EQT EQT Corp. Neutral NAV Navistar International Corp. Neutral WLK Westlake Chemical Corp. Neutral
ERJ Embraer Buy NDAQ Nasdaq Inc. Neutral WM Waste Management Inc. Sell
ES Eversource Energy Neutral NE Noble Corp. Sell WMB Williams Cos. Buy*
ESV Ensco Plc Neutral NI NiSource Inc. Neutral WSTC West Corp. Sell
ETE Energy Transfer Equity Neutral ODP Office Depot Neutral XEC Cimarex Energy Co. Buy
ETN Eaton Corp. Neutral P Pandora Media Inc. Buy* XRAY DENTSPLY Sirona Inc. Neutral
EVER EverBank Financial Corp. Sell PAGP Plains GP Holdings Neutral YUM Yum! Brands Inc. Sell
EVH Evolent Health Inc. Buy* PF Pinnacle Foods Inc. Buy ZEN Zendesk Inc. Buy
FEYE FireEye Inc. Sell PGRE Paramount Group Neutral ZNGA Zynga Inc. Neutral

Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 8

March 16, 2017 Quantamentals: The Quality Factor

Appendix 1: Other Factor Exposures

Given the construct of Integrated, the top(bottom) 20% of companies are naturally skewed
towards high(low) growth, high(low) returns and low(high) multiple. Further, the long-short
pair tends to be a bias towards low leverage, large companies and lower volatility.

Exhibit 15: Factor Exposures for the Integrated Strategy

Factor decomposition for Integrated Quintiles 1 and 5
40% 50% 40%
Growth Q1 Returns Q1 Multiple Q1
Q5 Q5 Q5
40%
30% 30%

30%
20% 20%
20%

10% 10%
10%

0% 0% 0%
Q1 Q2 Q3 Q4 Q5 Q1 Q2 Q3 Q4 Q5 Q1 Q2 Q3 Q4 Q5
High Low High Low Low High
Growth Growth Returns Returns Multiple Multiple

40% Q1 40% Q1 30% Q1

Balance Sheet Size Volatility
Q5 Q5 Q5
30% 30%
20%

20% 20%

10%
10% 10%

0% 0% 0%
Q1 Q2 Q3 Q4 Q5 Q1 Q2 Q3 Q4 Q5 Q1 Q2 Q3 Q4 Q5
Low High Large Small Low High
Leverage Leverage Size Size Vol Vol

Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 9

March 16, 2017 Quantamentals: The Quality Factor

Appendix 2: IP Factor Methodology

Calculation methodology for the GS Investment Profile (IP) scores:
The Goldman Sachs Investment Profile (IP Scores) is a tool we use to better understand
the investment context for a security by comparing key attributes of that security to the
market (i.e., our coverage universe) and sector peers. We leverage our in-house analyst
models and estimates, which we believe provide a more forward looking/accurate
measurement of company expectations/performance.

Returns and Valuation use the Goldman Sachs analyst forecasts at the fiscal year-end at
least three quarters away. Growth uses the value for the fiscal year at least seven
quarters away compared with the year at least three quarters away (on a per-share basis
for all metrics).

These metrics are normalized by assigning a Z-score based on the companys position
within the overall distribution of all IP scores (assuming a normal distribution). The
average of these normalized metrics is taken (or average of the applicable metrics in case
of financials) and is then used to generate a percentile score from 1 to 100 for each factor.

We bucket these company scores into highest quintile (Q1 or top 20%) and lowest
quintiles (20%) within each coverage sector, and construct portfolios with an equal
number of stocks under Q1 and Q5. The performance of these top and bottom quintile
tails, as well as a sector-neutral portfolio (Buy Q1, Sell Q5) of the two, is tracked and
rebalanced on a weekly basis.

Measures used in each factor:

Integrated: calculated as an aggregate score based on Returns, Growth and Valuation.
Q1: stocks with the highest integrated score within their sectors; Q5: stocks with the
lowest Integrated score.

Returns: calculated using an average of return on equity (ROE), return on capital

employed (ROCE), and cash return on cash invested (CROCI) for each stock. Only ROE is
considered for financial stocks. Q1: stocks with the highest 20% returns within their
coverage sector; Q5: stocks with the lowest 20% returns.

Growth: calculated using an average of a companys sales, EBITDA and EPS growth. For
financials, we use only EPS and sales growth. Q1: stocks with the highest sector relative
growth; Q5: stocks with the lowest growth.

Valuation: calculated using an average of price/earnings, price/book, dividend yield,

enterprise value/EBITDA, enterprise value/free cash flow and enterprise value/debt
adjusted cash flow. Only P/E, P/B and dividend yield are used for Financials. Q1: stocks
with the lowest multiples within their sector; Q5: stocks with the highest multiples.

Volatility: calculated as the standard deviation of daily total returns over a trailing 12-
month period. Q1: stocks with the lowest volatility on a sector relative basis; Q5: stocks
with the highest volatility.

Balance sheet: calculated using net debt/EBITDA (leverage). This is used only for
nonfinancial stocks. Q1: stocks with the lowest leverage within their sectors; Q5: stocks
with the highest leverage.

Size: calculated using market capitalization. Q1: Largest 20% stocks on a sector relative
basis; Q5: Smallest 20% stocks.

Momentum: based on stock performance over a 6 month lookback period (Q1-Q5). Q1:
Sector leaders (top 20% performers); Q5: Sector laggards (bottom 20%).

Short Interest: based on Short Interest Days (SI / ADTV). Q1: Lowest Days-to-Cover; Q5:
Highest Days-to-Cover. Based on exchange data which is released with a lag.

Goldman Sachs Global Investment Research 10