By Jacob Sonenshine

In a shaky market, look for stocks that have the rare combination of quality and the healthy potential for growth.

Conditions now epitomize the effects of uncertainty. The S&P 500 has fallen 9% from its record high on Feb. 19. The S&P 1500, which includes a broad range of U.S. stocks, has dropped by the same amount. Many stocks are down because of President Donald Trump's tariffs on imports from China, Mexico, and Canada.

The direct impact is that tariffs lift the cost of hundreds of billions of dollars worth of goods, force companies to raise prices, and threaten to reduce consumption. That would dent companies' sales and profit margins, with even worse effects on earnings.

The direct hit is just the tip of the iceberg. No one knows how much demand might drop, so businesses may invest less to be on the safe side. That means less hiring and less consumer spending, which could send the economy into a negative spiral.

That could further pressure the S&P 1500, which still trades at a relatively expensive 19.9 times the aggregate earnings analysts expect its component companies to generate over the coming year. For comparison, the three-year average is 18.6 times.

The current 19.9 times is based on earnings forecasts that likely are too high, failing to reflect the tariffs the Trump administration has begun to roll out. Right now, estimates for 2025 sales are up a tick since the start of the year and earnings estimates are essentially unchanged. Stocks are likely to fall as Wall Street lowers its forecasts.

The trick for investors is to find stocks that are already fairly cheap, have high growth potential, and are in a strong enough financial position to withstand a recession.

Barron's screened for such stocks in the S&P 1500. Our most important criterion was that companies had to have analysts forecasting annual sales growth of 5% or greater over the next three years. That would mean they are expanding faster than the economy and inflation.

To make the cut, companies also had to have reported better earnings than expected in at least 15 of the past 20 quarters. The screen also called for them to have produced free cash flow in the past 12 months, with net debt of less than two times their expected earnings before interest, tax, depreciation, and amortization.

We then excluded all companies with a market value of less than $10 billion to rule out smaller, lower-quality businesses. Energy, financial, and real estate companies, whose growth is generally lower, were ruled out as well, especially because the first two are particularly vulnerable to recession.

And to make sure we were finding stocks with value, qualifying companies had to trade at lower price/earnings multiples than the S&P 1500.

The screen turned up 43 names, including Micron Technology, Advanced Micro Devices, Dell Technologies, Adobe, McKesson, UnitedHealth Group, Aecom, Darden Restaurants, Deckers Outdoor, and Expedia.

It also included Applied Materials, the $125 billion semiconductor- equipment maker. The consensus call among analysts tracked by FactSet is for it to report $29.1 billion in sales this year, for 6% growth, a reacceleration from low single-digit figures in the past couple of years. The sales forecast has dropped slightly over the past few months, while the stock has been falling, indicating that slightly lower expectations for profits are reflected in the price.

Analysts expect the same growth annually over the two years after 2025. This makes sense, given that the total market for chip-making equipment is expected to grow by percentages in the mid single digits annually to more than $150 billion by 2029, according to Markets and Markets, an industry research hub. Applied Materials is one of the three largest producers in the space, which is growing as chip makers tool up to produce semiconductors for artificial intelligence.

If sales rise that fast, earnings per share should increase by double-digit percentages. Profit margins could inch higher because the company wouldn't have to significantly increase employee compensation and other costs, while interest expense will remain fairly flat.

Applied Materials generates billions of dollars in annual free cash flow and has more cash than debt. That combination positions the company to buy back more stock, furthering increasing EPS.

Investors who want exposure to the entire AI trend and to avoid the risk that comes with betting on a single company can consider Lam Research. The $98.5 billion semiconductor-equipment maker also passed Barron's screen.

Analysts expect 11.8% annual sales growth for the coming three years, which would bring the total to just under $23 billion by 2027. Wall Street has penciled in higher margins and share repurchases, so consensus forecasts call for 17% annual growth in EPS.

There's hope out there for choosy investors.

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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March 18, 2025 16:14 ET (20:14 GMT)

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