The ‘rule of 10’ can help investors identify the next big winners in the stock market, says Goldman Sachs

Detail of a gold bull crossing the finance section of a newspaper - stock photo — Stocks to buy before earnings.Caspar Benson/Getty Images

Investors are always on the lookout for secular growth stocks that could become the next mega-cap giant like Apple or Microsoft.
Goldman Sachs has identified financial characteristics that could help investors in their search.
This is the “rule of 10s” selection tactic used by Goldman to identify secular growth stocks.

After the meteoric rise of mega-cap tech giants like Apple, Microsoft and Alphabet over the past decade, more and more investors are looking for the big stock market winners of tomorrow.

In an effort to identify future mega-cap giants, Goldman Sachs has analyzed the financial similarities behind today’s winners and used this information to develop a screen that can help investors spot future growth drivers in the market. stock market.

In a recent note, Goldman outlined its “rule of 10s” in an effort to filter out secular growth stocks from the S&P 500 that can grow through all stages of an economic cycle. The screen focuses on double digit revenue growth.

“We select S&P 500 stocks that have increased sales by at least 10% in each of the previous two years and are expected to increase sales by at least 10% in the current year and each of the next two years,” said David of Goldman Sachs. Kostin said.

There are currently 20 stocks in the S&P 500 that meet this criteria, and they are in good company.

“The seven mega-cap tech stocks grew in sales at a CAGR of 15% from 2013 to 2019, compared to 4% growth for the S&P 500. With the exception of 2022, these stocks grew in sales at a faster than the broader index every year since 2019,” said David Kostin of Goldman Sachs.

And mega-cap tech stocks are still in great shape, according to Kostin, with Wall Street estimating they will grow earnings at an 11% annual rate through 2025, compared to just 4% growth for the S&P 500.

While stocks that met this criterion have significantly outperformed the S&P 500 over the past decade, so must be stocks that have experienced consistent earnings growth of at least 10%. This screen is particularly poignant after 2022, as investors shifted their focus from “growth at all costs” to sustainable earnings growth.

Goldman has identified 18 S&P 500 companies that meet this criterion, and only eight stocks that meet both the 10% revenue growth and 10% revenue growth criteria.

These are the eight companies in the S&P 500 that meet Goldman Sachs’ “rule of 10” selection criteria for revenue and earnings.

8.ServiceNow