GOLDMAN SACHS: Buy these 7 stocks set to offer explosive profit growth as the rest of the market slows

REUTERS/ Gene Blevins

• Goldman Sachs chief US equity strategist David Kostin says investors looking for high-quality companies should look for high levels of return on equity, a trait that's becoming harder to find.
• ROE is a measurement of a company's effectiveness at deriving earnings growth from its investments. Kostin says stocks that generate high ROE growth aren't that expensive relative to other measurements of quality.
• Kostin forecasts that the S&P 500 as a whole will deliver a negative ROE in the next 12 months, so he thinks the companies that can deliver growth are likely to be rewarded.
• Click here for more BI Prime stories.

With investors nervous about the trade war and the threats is poses to the economy, betting on quality has been an effective strategy this year. Or at least it was until September, when a dramatic market shift took place as investors rotated out of proven winners.

Goldman chief US equity strategist David Kostin says that the high-quality strategy isn't dead, although he does see it becoming increasingly difficult to find stocks that are priced affordably and primed for outperformance.

He says one way to identify those is by assessing return on equity, a measurement of a company's ability to deliver earnings growth from its investments. High-ROE stocks represent a subset of the so-called quality strategy that are still attractively priced, according to Kostin.

"High returns on capital is one representation of 'quality' that still trades at a reasonable valuation," Kostin said in a note to clients.

He continued: "We expect investors will continue to assign a scarcity premium to stocks with high ROE."

To that end, here are seven stocks identified by Kostin as offering the strongest ROE growth over the next 12 months. They're ranked in increasing order of future ROE growth.

Get the latest Goldman Sachs stock price here.