“Can tech keep up the pace?” is a burning question for many with regards to a sector that helped drive the S&P 500
SPX,
to its best first half since 2019. On the plus side, history dictates that one good half can lead to another, though some worry too much investor exuberance could spoil things.
So naturally, another obvious question looking ahead is how to find outperformers like the so-called “Magnificent Seven” tech names that led the first half — Amazon
AMZN,
Microsoft
MSFT,
Alphabet
GOOGL,
Meta
META,
Tesla
TSLA,
and Nvidia
NVDA,
Our call of the day, from a team at Goldman Sachs led by chief U.S. equity strategist David Kostin, offers up some ideas on that front and spoiler, Tesla is among them.
To find the new names, Goldman spiffed up its “Rule of 10” stock screen that pinpoints companies with realized and future sales growth greater than 10% for 2021 to 2025. They note that strong sales growth has been a common thread running through each of those names, as each have grown sales at a faster rate than the broader index since 2010, except 2022.
“The largest tech stocks in the U.S. equity market make it clear that identifying firms capable of posting sustained 10%+ sales growth in their nascent stages can be rewarding for investors. Rapid and consistent sales growth was a common attribute of today’s largest stocks as they ascended the index ranks,” said Kostin and the team.
Roughly 20 names meet this criteria and among them is one of those big tech outperformers — Tesla. Salesforce
CRM,
has consistently made the cut, said Goldman. The top 10 names on this list are Enphase Energy
ENPH,
Tesla, SolarEdge
SEDG,
Palo Alto Networks
PANW,
ServiceNow
NOW,
Paycom Software
PAYC,
Fortinet
FTNT,
DexCom
DXCM,
and Insulet
PODD,
Goldman also presented a screener for stocks based on net income growth. Those must have more than 10% per year net income growth for the 2021 to 2025 period.
Currently 18 names fit this criteria and are trading at below average premiums to the S&P on a price/earnings and price to earnings growth ratio, they say. The top 10 are Baker Hughes
BKR,
Match Group
MTCH,
Insulet , Aptiv, Bookings Holdings
BKNG,
ServiceNow, Schlumberger
SLB,
Chipotle
CMG,
Paycom and Halliburton
HAL,
And eight companies are on both lists: Paycom, Fortinet, Insulet, Salesforce, Intuit, Cadence Design Systems
CDNS,
and Aptiv.
As an aside, Kostin and the team address the whole narrow market issue, saying that in any given year, returns have been concentrated on a group of outperformers. Observe the below chart:
“Excluding the top 10 contributors in each year, the S&P 500 would have delivered an 8% average annual return since 1990 (vs. 12% for the full index),” they said. The top 10 contributors account for roughly 12 percentage points of the S&P 500’s 15% year-to-date return.
Don’t miss: Amazon is the cheapest of the Magnificent Seven stocks by this important measure
The chart
Here’s a chart from head of @topdowncharts, Callum Thomas, looking at some residential property values that are starting to roll over a bit:
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