- Republicans' tax law has been a major boon for stocks, which have seen their profit forecasts adjusted upward throughout 2018. But all good things must come to an end.
- Goldman Sachs (NYSE:GS) has identified 14 stocks as being best positioned to outperform their peers even as the positive effect of the tax cuts wanes.
Republicans' tax law has given an undeniable boost to corporate earnings-growth expectations. But what happens after the initial high wears off?
We're about to find out, says Goldman Sachs, whose 2019 forecasts for S&P 500 profit expansion have stayed unchanged even as 2018 estimates have skyrocketed.
That's because Goldman, like much of Wall Street, realizes that the shot in the arm companies received from the tax law is a one-time deal. It's been great while it's lasted, but the firm says it is time to consider what the future holds.
For Goldman, traders' best course of action is to identify the stocks positioned to outperform even as the positive effect of tax reform fades. And it has done the dirty work for you.
Before we get into their stock picks, consider the firm's methodology, which is centered on margins. Goldman targets companies boasting high, stable gross margins that have shown no recent weakness. And those firms just so happen to have beaten their weak-margin peers by roughly 900 basis points year-to-date.
"As the margin tailwind from tax reform passes, firms with the ability to sustain or grow profit margins will become increasingly scarce and should be rewarded by investors," a group of Goldman strategists led by Ben Snider wrote in a client note. "The market typically rewards companies with high margins when the outlook for corporate profitability weakens."
Without further ado, here are the 14 stocks in the Russell 1000 index best positioned to withstand the fading effect of tax reform, because of their high and stable gross margins. They're arranged in decreasing order of trailing one-year gross-margin change.
14. Celgene (NASDAQ:CELG)
Ticker: CELG
Sector: Healthcare
Market cap: $57 billion
Year-to-date return: -25%
1-year gross margin change: 93 basis points
13. McCormick (NYSE:MKC) & Co.
Ticker: MKC
Sector: Consumer staples
Market cap: $14 billion
Year-to-date return: +3%
1-year gross margin change: 95 basis points
12. VeriSign (NASDAQ:VRSN)
Ticker: VRSN
Sector: Information technology
Market cap: $13 billion
Year-to-date return: +14%
1-year gross margin change: 103 basis points