Ok, look: Goldman spent what looks like a shit load of time scouring the globe for “secular growth stocks.”
And the reason you should care about this is because when things are going ok, but not great, growth should outperform value. As far as Goldman is concerned, that’s what you’re about to see in terms of the global economy – good, but not great. To wit:
World GDP growth has hovered between 3% and 4% post-crisis. Our Economics team forecasts that world GDP growth will remain flat at roughly 3.9% through 2020. Although most major, developed economies have experienced a rebound in growth in 2017, DM GDP growth is expected to decelerate from 2.2% in 2017 to 1.7% in 2020. We expect growth stocks will outperform value stocks in this period of steady but unspectacular economic activity.
But finding companies that can sustain fast top line grow is hard. They’re a rare breed – like conservatives with working brains. How rare are they, you ask? Well, as Goldman notes, “of the 1,514 companies under GS equity research coverage with historical data available, there are just 41 companies that have grown sales by 10% or more for each of the past 10 years.”
As you can see, the lion’s share of these companies are in China and the U.S. Which isn’t surprising.
But you don’t have to meet that criteria to land yourself on the bank’s list of “secular growth stocks.” All you have to do is have “actual sales growth of at least 10% in 2015 and 2016.” Actually, no. That’s not all you have to do to get on Goldman’s list. Here are the criteria:
- actual sales growth of at least 10% in 2015 and 2016;
- forecast sales growth of at least 10% in 2017 and 2018 by GS analysts;
- consensus long-term earnings growth of at least 10%
In addition to those criteria, Goldman is going to go ahead and “restrict companies based on market capitalization (greater than $2 billion), valuation (excluding the top quintile of EV/Sales for a given region), and liquidity (greater than $10 million average daily trading volume).”
Well out of some 2,300 stocks covered by the bank globally, only 50 made the final list and based on the valuation constraint, you’ve probably surmised that at least of couple of the FANGs didn’t make it in. Here’s Goldman:
Several prominent growth stocks do not meet our secular growth at a reasonable price criteria (“secular GARP”). In the US, perennial mutual fund and hedge fund favorite positions Facebook and Netflix both meet our secular growth criteria, but trade at 14x and 8x EV/Sales multiples, respectively, ranking in the 90th percentile of S&P 500 stocks. Microsoft does not meet the Rule of Ten growth criteria because its sales grew by just 2% in 2015 and 2016. In Asia, Alibaba and Tencent are not included in our list because of their elevated EV/Sales ratios (17x and 15x, respectively). Baidu is also excluded from our secular growth screen given it had just 6% sales growth in 2016.
So you know, sorry to all of the people out there telling you that valuations don’t matter and that you should just buy the tech high-flyers at any price – Goldman’s not buying it (figuratively or literally).
Here’s the full list:
No kidding. And look at biotech struggles as of late, a sector which often leads other.
Also, notice how the risk parity strategy is fvckin up today.
But it’s just one day so btfd, lol.