Goldman says hide out in these stocks with big margins as earnings take hit from coronavirus

Published Tue, Feb 18 20209:56 AM EST

A rebound in earnings growth that investors anticipated might get derailed by the coronavirus, Goldman Sachs warned, advising clients to hide out in its portfolio of companies with high and stable gross margins. "Earnings risks are tilted to the downside," David Kostin, Goldman's head of U.S. equity strategy, said in a note on Friday. "Some stocks likely to be affected by the coronavirus outbreak, such as airlines, cruises, and stocks with high China sales, have also experienced more negative EPS revisions than sector peers." While the S & P 500 's fourth-quarter earnings have been better than expected so far, the consensus for 2020 profits growth has come down, Kostin pointed out. The coronavirus came at a time when companies are already grappling with slowing demand and rising costs, adding another source of pressure. The 2020 EPS estimate has been cut by 0.7% during the past month and 1.2% during the past three months, the analyst said. "Margins remain a key risk for investors and we expect only limited margin expansion through 2021," Kostin said. "The margin outlook is likely to remain challenging unless companies are able to raise prices to pass through costs or the labor market cools." Goldman screened Russell 1000 stocks with the highest and most stable gross margins relative to sector peers and where gross margins have not declined during the past two years. The median stock from Goldman's screen has grown its margin by 1.3% in the past year, while the typical Russell 1000 stock only saw an increase in margins by merely 2 basis points. Goldman projects the S & P 500 to see a margin expansion of just 18 basis points through 2021. "High 'pricing power' stocks have typically outperformed when the market perceives a challenging environment for corporate profit margins," Kostin said. Stocks with the most gross margin expansion in the past year including biotech company Seattle Genetics , Johnson & Johnson , software company Pegasystems and toy company Hasbro , according to Goldman.

Traders work on the floor at the New York Stock Exchange, January 14, 2020.

Brendan McDermid | Reuters

"Earnings risks are tilted to the downside," David Kostin, Goldman's head of U.S. equity strategy, said in a note on Friday. "Some stocks likely to be affected by the coronavirus outbreak, such as airlines, cruises, and stocks with high China sales, have also experienced more negative EPS revisions than sector peers."