Step Aside FAAMGs: Goldman Presents The "Future Five" Stocks That Will Define The Decade

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Presenting the "future five."

Having narrowed down the list of FAAMG replacements to 21, Goldman then applies a second filter to further concentrate the basket, with Kostin writing that most of its Rule of Ten stocks can be broadly classified into five themes, which we expect will be increasingly important in the future:

  1. Computerization of health care: Technology has permeated all aspects of life, especially the health care industry. Rule of Ten stocks leveraged to this theme: ABMD, ALGN, DXCM, EW, ISRG.
  2. Digital transformation of business: “Software is eating the world,” Marc Andreessen famously quipped back in 2011. The integration of software platforms by businesses outside of the technology sector has been in process for years, but equity analysts expect this trend will accelerate. Rule of Ten stocks leveraged to this theme: ADSK, ADBE, ANSS.
  3. Workflow automation: Companies are increasingly using software to automate and optimize workplace tasks, such as HR, payroll processing, and IT and expense management. Rule of Ten stocks leveraged to this theme: CRM, NOW, PAYC.
  4. E-commerce and digital payments: The coronavirus has expedited shifts to e-commerce from in-person sales and to digital payments from cash. Rule of Ten stocks leveraged to this theme: MA, PYPL.
  5. Advancements in life sciences: Health care companies continue to discover treatments and cures for medical conditions that affect large portions of the population. Rule of Ten stocks leveraged to this theme: INCY, VRTX.

Finally, among those five themes, Goldman highlights potential "future five" stocks that the bank's equity analysts believe are well-positioned and have compelling growth opportunities: VRTX, ADSK, PYPL, ISRG, NOW, or VAPIN for short. During the past few years, these stocks have steadily climbed the S&P 500 equity capitalization ranking table.

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As expected, most of the future five are in the “second-tier” in terms of size, with no stock ranking in the current top 15 of the S&P 500. All five stocks rank in the top 150 of the index, but only PYPL ranks in the top 20. While growth stocks have often moved up in the ranking during the past few years, several stocks in the current top 15 of the index have been consistently large for many years. For instance, Berkshire Hathaway, Johnson & Johnson, and JPMorgan have ranked in the top 15 in every month since 2013.

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The future five offers 5x the sales growth of the S&P 500, and while carrying elevated absolute valuations, Kostin hedges this by noting their reasonable valuations relative to growth expectations. Consensus estimates that the median future five stock will have a sales CAGR of 20% from 2018 through 2022E (vs. 4% for the S&P 500 and 22% for FAAMG). Additionally, consensus estimates put the long-term EPS growth rate for the median future five company at a 35%, compared with 15% for FAAMG and 8% for the S&P 500. This high rate of growth is partly reflected in high valuation: The median future five stock trades at 42x 2021E P/E multiple (vs. 20x for the S&P 500 and 28x for FAAMG), but 1.8x PEG ratio (vs. 2.4x for the S&P 500 and 1.9x for FAAMG). The average large-cap core fund is underweight the typical future five stock, but large-cap growth funds are modestly overweight them.

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Moon Kil Woong 1 month ago Contributor's comment

LOL good luck with the vaccine. It will need to be treated like the flu and more effort and expediency should be spent on quick approval and development of therapeutics. Big pharmas want a vaccine because they know they will get a lot of money and nothing may come of it for a year or longer (maybe never). As for the future FAANG stocks (don't include Microsoft please) they are not as broad or as encompassing in tech as the current ones. They should do well but are more prone to technology displacement. I own one or more of these but would not switch unless you wish to replace Facebook with another stock.

I agree medical technology will continue to advance and play a bigger role in the economy. However, it is unclear which will dominate besides maybe ISRG who is the current leader. Even here, there will probably be many different surgical robotics doing different surgeries in the future.

Dick Kaplan 1 month ago Member's comment

The CDC Chief today said that a vaccine won't be widely available till 2nd or 3rd quarter of 2021.