GOLDMAN SACHS: Buy these 12 stocks to keep crushing the market as profit margins shrink

• David Kostin, the chief US equity strategist at Goldman Sachs, says an elite handful of companies with high, steady profit margins will likely outperform the market in the months ahead.
• He says the combination of rising wages and high costs will keep profits under pressure for at least the rest of the year - and that comes after a year of already-weakened margins.
• The stocks on his list have posted much bigger margins in the last year and haven't suffered a decline in margins at any time in the last two years.
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A surprise can be a welcome distraction, and David Kostin - the chief US equity strategist for Goldman Sachs - says a little bit of good news over the last few weeks may have papered over a lot of worry.

Fourth-quarter earnings were better than expected overall, and that's helped stocks set new records in spite of the spreading Wuhan coronavirus epidemic, the unsettled Democratic presidential primaries, and other sources of uncertainty.

Kostin argues that a surprisingly low tax rate helped corporate America beat expectations. But he also thinks the cheeriness that inspired may not last. That's because company profit margins look week, and that creates a significant threat to earnings, the main source of fuel for the stock market.

"Margins contracted in every sector in the S&P 500 and declined in aggregate for the fourth consecutive quarter," he wrote in a note to clients. "Margins remain a key risk to the earnings outlook."

A tight labor market with rising wages, along with other costs for companies, mean that's going to continue to be an issue for the rest of this year, in Kostin's view. He says there's little room for improvement for now.

"The margin outlook is likely to remain challenging unless companies are able to raise prices to pass through costs or the labor market cools," he wrote.

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Adding to that risk, according to Kostin, is that investors were more likely than usual to dump stocks that missed earnings expectations in the fourth quarter.

So he's pulled together a list of the companies that are best protected from that earnings risk. As a group, Kostin writes that they have lot of pricing power, and companies with that power generally outperform when investors think margins are coming under threat.

Each of these 12 stocks have stronger gross margins than other companies in their respective sectors, and those margins have not fallen during the past two years, giving them a track record of stability. They're arranged from lowest to highest based on how much their margins expanded over the past year.

Get the latest Goldman Sachs stock price here.