The 'Rule of 10' can help investors identify the next big stock market winners, according to Goldman Sachs (2024)

Investors are always on the hunt for secular growth stocks that could become the next mega-cap giant like Apple or Microsoft.
Goldman Sachs identified financial characteristics that could help investors in their search.
This is the "Rule of 10" screening tactic used by Goldman to identify secular growth stocks.

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After the stunning ascent of mega-cap tech giants like Apple, Microsoft, and Alphabet over the past decade, more and more investors are on the hunt to find tomorrow's big stock market winners.

In an effort to identify the future mega-cap giants, Goldman Sachs analyzed the financial similarities behind today's winners and used that information to develop a screen that can help investors scout out the future growth engines of the stock market.

In a recent note, Goldman highlighted its "Rule of 10" in a bid to screen for secular growth stocks in the S&P 500 that can grow in all stages of an economic cycle. The screen focuses on revenue growth above 10%.

"We screen for S&P 500 stocks that grew sales by at least 10% during each of the previous two years and are expected to grow sales by at least 10% in the current year and each of the next two years," Goldman Sachs' David Kostin said.

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

"The seven mega-cap tech stocks grew sales at a 15% CAGR from 2013 to 2019, compared with 4% growth for the S&P 500. Excepting 2022, these stocks grew sales at a faster rate than the broader index in each year since 2019," Goldman Sachs' David Kostin said.

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

While stocks that met this criteria have outperformed the S&P 500 considerably over the past decade, so to have stocks that experienced consistent profit growth of at least 10%. This screen is especially poignant after 2022, as investors shifted their focus from "growth at all costs" to sustainable growth in profits.

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

These are the eight S&P 500 companies that meet Goldman Sachs' "Rule of 10" screening criteria for both revenue and profits.

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