Stocks with the fastest projected revenue growth in 2019 are outperforming the S&P 500 index (SPX) so far this year, and Goldman Sachs expects them to maintain their leadership. Such firms are well-positioned to increase profit margins, total profits, and thus their stock prices. "In a market characterized by modest, sales-driven EPS growth, investors typically reward firms with the fastest expected top-line growth," Goldman says in their latest U.S. Weekly Kickstart report.
Goldman assembled a basket of 50 S&P 500 stocks with the fastest expected sales growth in 2019 based on consensus estimates, noting, "The median constituent is expected to grow revenues by 10% in 2019 compared with just 4% for the typical S&P 500 stock." Among those 50 stocks are these seven: Costco Wholesale Corp. (COST), Concho Resources Inc. (CXO), Charles Schwab Corp. (SCHW), SVB Financial Group (SIVB), Progressive Corp. (PGR), Align Technology Inc. (ALGN), and Centene Corp. (CNC). More detail is in the table below. This is first of two stories that Investopedia will devote to that report.
7 Revenue Winners
(Estimated 2019 Revenue Growth)
- Costco, 8%
- Concho Resources, 13%
- Schwab, 9%
- SVB Financial, 24%
- Progressive, 14%
- Align Technology, 23%
- Centene, 18%
- Median S&P 500 stock, 4%
Source: Goldman Sachs
Significance for Investors
"The [high revenue growth] basket has outperformed [the] S&P 500 by 400 bp YTD (14% vs. 10%) as estimates of index-level sales growth have continued to decline," the report observes. Calculations were as of March 7, 2019.
From the low closing price that the previous bear market hit on March 9, 2009, the S&P 500 has delivered a total return of 401%, for an average annualized rate of 17.5%, per Goldman's calculations. They estimate that profit growth drove almost 75% of the 10-year gain in the index, while a rising forward P/E ratio, from 10x to 16x, accounted for just 19%.
Looking at the components of profit growth, report indicates that S&P 500 revenues increased by 43% over those 10 years, and generated 22% of the gain in the index. The average profit margin for the index expanded by 490 basis points (bp), from 7.3% to 12.2%, contributing about 28% of the rise in the S&P.
SVB Financial Group is the parent of Silicon Valley Bank, an institution based in Santa Clara, California that specializes in funding technology startups. The gain posted by its stock through March 7 was 26%, versus 13% for the median stock in the basket and 12% for the median S&P 500 stock. Consensus estimates point to sales growth of 24% in 2019 and 11% in 2020, the latter figure almost double the 6% growth rate projected for the median S&P 500 stock.
As with many banking and financial companies, SVB is relatively cheap, with a forward P/E of 12x, versus 17x for the median S&P 500 stock and 22x for the median stock in the basket. Earlier this year, the SVB paid $280 million to acquire Leerink, a Boston-based investment banking firm that focuses on serving health care and life sciences companies.
One downside of investing in companies with above-average revenue growth expectation is that they command valuations far above the market averages, as noted above. This presents a risk of significant devaluation should reported revenues fail to meet expectations.