Buy stocks like Adobe and VMware to ride out a trade war with China

Goldman Sachs says there is still an investment strategy that can outperform even if the trade war with China gets worse.

The firm recommended companies with strong and sustainable profit margins.

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On Monday, White House economic advisor Larry Kudlow said discussions with China over trade aren’t progressing and there is no “imminent” trade deal with the Asian country.

“Trade tensions remain in the spotlight as tariffs on $200 billion of imports from China were implemented … and more tariffs look likely to come. Tariffs threaten corporate earnings through higher costs and lower margins,” Goldman’s chief U.S. equity strategist David Kostin said in a Friday report to clients titled “Stocks with high and stable margins have pricing power to withstand rising input costs from tariffs.”

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The Trump administration’s latest tariffs of 10 percent on $200 billion of imports from China took effect last week. President Donald Trump, in a Sept. 17 statement, said the tariffs would rise to 25 percent on Jan. 1, 2019.

The strategist said the firm’s basket of companies with “high and stable” profit margins outperformed a list of “variable” profit margin stocks by 18 percentage points so far this year.

“As the boost from tax reform fades, firms with the ability to maintain or expand profit margins will become increasingly scarce and will likely be rewarded by investors,” he said.

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Here are seven companies in the Goldman Sachs “high and stable gross margins” stock basket recommended by Kostin.

Source: cnbc.com | Original Link