Every investor wants a portfolio that produces returns, but finding the right stocks to do so is always a challenge. Goldman Sachs analysts developed a data-driven rule to sift through the crowd of stocks and find the stocks that are producing solid returns.
The key to Goldman's “Rule of 10” lies in each company's projected revenue growth — the company looks for stocks with the potential to achieve a compound annual growth rate (CAGR) of 10% or more over multiple years. According to David Kostin, the bank's chief investment officer and head of investment strategy, rapid and consistent revenue growth is a predominant characteristic of today's leading stocks as they climb the rankings.
“We're updating our ‘Rule of 10' screen, which identifies stocks with realized and projected compound annual sales growth of greater than 10% over the five years from 2021 through 2025,” Kostin noted.
Some of Goldman Sachs' top analysts recommend stocks that meet the “rule of 10” criteria. We'll take a look at two of them, using data from the TipRanks platform. Both are S&P-listed companies and both have demonstrated high, sustained revenue growth over time – with great potential to sustain that performance. It also doesn't hurt that each stock is so admired by the rest of the analyst community that it earns a Strong Buy consensus rating. Let's take a closer look.
SolarEdge Technologies (SEDG)
Goldman's top pick on our list is SolarEdge Technologies, a developer and manufacturer of microinverters, which are an essential technology in solar power systems. Microinverters convert direct current, as produced by photovoltaic panels, into alternating current that can be used in grid and home systems. With a market share of around 40%, SolarEdge is one of the leading companies in the US microinverter segment.
The company doesn't just rely on the microinverter business; It produces a wide range of solar technology products. The product line includes photovoltaic generation system monitors, power optimizers and even solar powered electric vehicle chargers for home use. SolarEdge markets its products directly to the residential and commercial customers, including building owners, small businesses, builders and installers.
Using Goldman's “rule of 10,” SolarEdge has a projected annual revenue growth of 24% from 2022 to the end of 2025. Few companies can achieve this remarkable level of sustained growth.
SolarEdge's current performance gives good reason to believe it will be in line with forecasts. The company presented several record numbers in its financial results for the first quarter of 23, the latest quarterly results released. That included record quarterly revenue of $943.89 million, earnings that grew 44% year over year and exceeded estimates by more than $12.05 million. Also included in the notes was non-GAAP EPS results of $2.90, a significant improvement from Q1 2022's figure of $1.20 and exceeding guidance by 95 cents.
In covering SolarEdge for Goldman Sachs, 5-star analyst Brian Lee sees the company's diversification as a key driver of its success. While acknowledging that SolarEdge has established itself in the US residential solar market, Lee notes that the company's business is growing fastest in Europe, as well as the commercial and industrial markets.
“For 2023, we expect Europe to be one of the fastest growing regions, with total solar installations growing >25% yoy (we expect Resi's growth to be in line with the overall market compared to the US residential end market <10% yoy and recent data suggests it could end up being even worse. Notably, SEDG's shipments to Europe accounted for about 60% of total volume in Q1'23. As for the end market, 50-60% of total volumes were shipped by SEDG to the C&I end market – which appears to have remained solid and resilient despite macro uncertainties vs. Resi, based on our channel reviews. Because of the above dynamic, we're more tactically positive about SEDG," Lee said.
To that end, Lee rates SEDG stock as a “buy,” unsurprisingly given his comments, and puts a price target of $445, suggesting the stock has upside potential of about 65% in a year. (To view Lee's track record, click here)
Overall, SolarEdge has received 13 analyst ratings recently, with a 12-to-1 split in favor of “buy” versus “hold.” Shares trade for $270.42, and the average price target of $389.54 points to a 44% gain over the next 12 months. (See SEDG Stock Forecast)
Intuit, Inc. (INTU)
The second stock we look at just wrapped up its strongest season of the year. Intuit is a software company best known for its two flagship products, TurboTax and QuickBooks. These software products provide tax calculation and tax return services, bookkeeping features, and other accounting tasks optimized for home or small business use. The company's other products include the personal software suite Credit Karma and the popular marketing automation system Mailchimp.
Intuit's product line aims to make it easier for the layperson to maintain and automate financial and marketing records. The company has over 100 million customers worldwide. The company operates 20 offices in 9 different countries and generated total sales of US$12.7 billion last year.
Applying Goldman's Rule of 10, we find that Intuit's CAGR for the years 2022 to 2025E is 13%, a solid figure that places the company well above the 10% threshold that Goldman uses to forecast the future success used. The company has plenty of room for future growth as its largest segment is tax preparation — and the US tax preparation market alone exceeds $11.2 billion. The global tax preparation market is valued at more than $28 billion this year.
The company ended its fiscal third quarter on April 30 and reported revenue of $6.02 billion, up 7% from the same period last year. Revenue came in just short of expectations, coming in at $73.9 million, or 1.22% below guidance. Bottom line, Intuit's non-GAAP earnings per share hit $8.92, up 17% year over year, and beat analysts' forecasts by 42 cents.
Kash Rangan, another Goldman 5-Star analyst, cites several reasons why Intuit is poised to capitalize on its growth potential. The analyst writes, “We see several long-term structural growth drivers: 1) Generative AI could solidify INTU's market leadership as it is uniquely positioned to leverage a large amount of tax-related data using LLMs.” Valued at ~$30 billion presents significant opportunities for TurboTax Live (which holds 3-5% of the market) to capture market share. 3) Since Intuit only handles about 10% of the roughly $2 trillion in volume happening on its platform, and 70% of B2B payments are still not digitized, we estimate its payments offering will generate $4-5 billion in revenue will reach US dollars. Intuit's ability to use cost levers to increase efficiencies despite reduced revenue visibility should also be rewarded.”
To show his positivity, Rangan has given Intuit stock a “buy” rating and price target of $565, showing he's confident the company will be up 25% in a year. (To see Rangan's track record, Click here)
This is another stock with a Strong Buy consensus rating from the street. The rating is based on 16 recent analyst ratings, including 15 buys versus a single hold. Intuit shares are currently trading at $451.57, while the median price target of $508.67 implies upside potential of around 13% over the next year. (See INTU Stock Forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is for informational purposes only. It is very important to do your own analysis before investing.