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Goldman Predicts the “Future Five” Stocks that Will Define the Decade

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

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This article was originally published by ZeroHedge.

Step Aside FAAMGs: Goldman Presents The "Future Five" Stocks That Will Define The Decade Tyler Durden Wed, 09/16/2020 - 11:05
By now it is common knowledge that never in the history of capital markets has so much value (and interest) been concentrated in just five tech stocks, the FAAMGs. According to Goldman the five largest companies comprise 23% and a staggering 39% of the capitalization of the S&P500 and Russell 1000 Growth indices (with Apple recently surpassing the market cap of the entire Russell 2000), respectively... and for good reason based on their YTD performance: AAPL, MSFT, AMZN, GOOGL,and FB have returned 40% YTD compared with 5% for the S&P 500. Furthermore, the firms form the pinnacle of the red hot "growth" factor as they are forecast to grow sales at a 22% annualized pace from 2018 to 2022 (vs. 4% for theS&P 500) and trade at 6x EV/sales (vs. 3x). That said, as Goldman's David Kostin writes in an overnight note, investors are increasingly searching for fast-growing firms beyond the "current five." The reasons range from skepticism about continued momentum and valuation concerns, to the purely structural. As Kostin notes, many mutual fund managers face limits on the weight of any individual stock in their portfolio (usually around 5% to be classified as a "diversified fund"). With several stocks exceeding the 5% threshold in benchmark indices, potential solutions for fund managers that face these limits include either reclassifying as a“non-diversified” fund or using factor- or performance-based substitutes for the largest constituents. So what options do investors who need to branch out beyond the "current five" have? The answer, in a moment, but first a look at how we got here. As Kostin writes, "the paths to market leadership varied for the "current five." AAPL is currently the largest stock in the index, with a market cap of roughly $2 trillion. AAPL experienced extraordinary growth in the late 2000s, rising from the 93rd largest S&P 500 stock at the start of 2005 to 11th in 2008, following the introduction of the iPhone in 2007. The stock has maintained its dominance since 2010 by combining its hardware business with services. AMZN has followed a similar path, entering the index in 2005 ranked 137th, but capturing substantial market share in e-commerce — often at the expense of near-term profitability — and growing to its current position as the third-largest company. FB and GOOGL both grew in size as private companies, entering the index in the top 25 and maintaining their rapid sales growth. In contrast, MSFT is the second-largest stock in the index, and has been one of the five largest stocks in at least one month of every year since 1995. Of course, maintaining market leadership can be a difficult task and this unprecedented concentration may well prove to be fleeing because as Goldman notes, "index leadership is difficult to maintain" adding that the list of companies comprising the top positions in indices is not immutable. For one, index membership fluidity stems from the survivorship bias inherent in their design. Underperforming firms decline in weight or may be removed altogether and are replaced by newer, faster-growing constituents.  Looking at the previous period of elevated market concentration, the Tech Bubble, saw the five largest stocks comprise 18% of S&P 500 market cap in 2000. But five years later, those same stocks accounted for 12% of market cap, and just 8% of market cap twenty years later. In contrast, 20 years ago the current five market leaders represented just 3% of the S&P 500 vs. 23% today. Only one of the five largest stocks in 2000 remains on the current list (MSFT) while the fifth-largest stock today (FB) was not even a member of the index until eight years ago. The point here is that as firms become larger, rapid growth is challenging and threats to market positioning are plentiful. Regulation has been a particular focus for the current five, with the Department of Justice and Federal Trade Commission investigating AMZN, AAPL, GOOGL, and - as the WSJ reported overnight - FB. New market entrants also pose a risk to market leaders. On average, 5% of S&P 500 index constituents turn over each year.  For instance, FB did not exist at the previous peak in market concentration in 2000. Finally, as in the case of XOM and Energy, industries may fall out of favor with investors. One last look back at history: in March 2000, the five largest stocks were expected to post 1999-2001 CAGR sales and EPS growth of 16% and 21%, respectively. The shares traded at a 2001E P/E of 44x and 10x EV/Sales. However, realized sales and EPS growth equaled just 8% and 12%, respectively. Today, the top five firms are forecast to deliver 2019-2021 CAGR sales and EPS of 15% sales and 14%, respectively, and trade at 2021E P/E of 33x and 5x EV/Sales. Expect a similar degree of disappointment when we look back at this time period in 20 years. But enough about the past; what about the future, and the companies that Goldman believes will be the "Future Five"? As Kostin explains in laying out his criteriea for screening for the "Future five", the defining characteristic of the “current five” has been rapid sales growth. FB, AAPL, AMZN, MSFT and GOOGL have managed to sustain high revenue growth in the otherwise low growth environment of the last cycle. As GDP growth slowed following the global financial crisis, so did sales growth for many firms. The S&P 500 has posted a 4% sales CAGR since 2009 versus 7% between 1970 and 2009. During the past decade, FAAMG grew its aggregate top-line at a 20% CAGR. Furthermore, the ability of these stocks to grow sales independent of the broader economic circumstances has been brought into focus by COVID-19 and has reaffirmed their label as “secular growth” stocks. To identify the potential "future five," Goldman used the Rule of Ten criteria that screens for stocks with a track record of strong realized sales growth and expectations of continued superior revenue growth; this concept was introduced back in 2016 when Goldman first introduced our “Rule of Ten” which attempted to identify secular growth stocks based on the following criteria:
  1. Realized sales growth of at least 10% in each of the last two years;
  2. Expected sales growth of at least 10% in each of the next two years (now using consensus estimates).
There are 21 S&P 500 stocks that meet these Rule of Ten criteria and these are listed below. Four of the “current five” (FB, AMZN, MSFT, GOOGL) meet the Rule of Ten. Naturally, these are excluded from Goldman's final list as the objective is to identify stocks with high likelihood of climbing significantly in equity capitalization ranking and becoming the "future five." Some statistics: these 21 stocks are forecast to generate 18% annualized sales growth between 2018 and 2022, much faster than the median S&P 500 stock (4%) but less than FAAMG (22%). From a valuation perspective, the stocks trade at a P/E on 2021E EPS of 43x and an EV/sales multiple of 9x, well above FAAMG (28x and 6x, respectively) and the S&P 500 (20x and 3x). Not surprisingly the returns differ too: an equal-weighted basket of our Rule of Ten stocks has returned 24% YTD compared with a 39% return for FAAMG and -4% for the equal-weighted S&P 500. Daily returns YTD for our 21-stock list of Rule of Ten stocks also had a 0.91 correlation with the returns of FAAMG. Daily excess returns of our Rule of Ten stocks have had a 0.73 correlation to our Growth factor. 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 highlight 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. 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. 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 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. It appears that the market already had a sense that these "future five" would emerges as competitors to the FAAMGs, and an equal-weighted basket of the future five has returned 38% YTD compared with a 39% return for FAAMG. The future five have also had a 0.91 correlation with FAAMG YTD, meaning managers may view these stocks as a similar alternative to FAAMG ownership in the event that FAAMG’s large index weights and portfolio construction limitations have hindered their ability to own these stocks. So now you know what Goldman is pitching to its clients as the next FAAMG basket. What is unclear is whether Goldman's prop traders are already selling their accumulated holdings in this basket to clients, or if it is buying alongside them.  Keeping an eye on the return of FAAMGs vs the "Future Five" will be an interesting exercise for the near future. That said, keep in mind that this alternative basket is will work only so long as the deflationary conditions that boosted the original FAAMGs to all time highs persist. If and when higher rates emerge, a process which according to the latest BofA fund manager survey will be catalyzed by a vaccine for Covid, inflation or even higher debt levels... ... the massively overbought tech sector will suffer and both "current" and "future" five baskets will tumble. In fact, one can argue that in a world where taking the opposite side of hedge funds and high net worth clients has been the most successful strategy in the past decade, shorting these "future five" may be the best hedge to a second tech crash, which many are warning is inevitable.

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The Coming Of The Police State In America

The Coming Of The Police State In America

Authored by Jeffrey Tucker via The Epoch Times,

The National Guard and the State Police are now…

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The Coming Of The Police State In America

Authored by Jeffrey Tucker via The Epoch Times,

The National Guard and the State Police are now patrolling the New York City subway system in an attempt to do something about the explosion of crime. As part of this, there are bag checks and new surveillance of all passengers. No legislation, no debate, just an edict from the mayor.

Many citizens who rely on this system for transportation might welcome this. It’s a city of strict gun control, and no one knows for sure if they have the right to defend themselves. Merchants have been harassed and even arrested for trying to stop looting and pillaging in their own shops.

The message has been sent: Only the police can do this job. Whether they do it or not is another matter.

Things on the subway system have gotten crazy. If you know it well, you can manage to travel safely, but visitors to the city who take the wrong train at the wrong time are taking grave risks.

In actual fact, it’s guaranteed that this will only end in confiscating knives and other things that people carry in order to protect themselves while leaving the actual criminals even more free to prey on citizens.

The law-abiding will suffer and the criminals will grow more numerous. It will not end well.

When you step back from the details, what we have is the dawning of a genuine police state in the United States. It only starts in New York City. Where is the Guard going to be deployed next? Anywhere is possible.

If the crime is bad enough, citizens will welcome it. It must have been this way in most times and places that when the police state arrives, the people cheer.

We will all have our own stories of how this came to be. Some might begin with the passage of the Patriot Act and the establishment of the Department of Homeland Security in 2001. Some will focus on gun control and the taking away of citizens’ rights to defend themselves.

My own version of events is closer in time. It began four years ago this month with lockdowns. That’s what shattered the capacity of civil society to function in the United States. Everything that has happened since follows like one domino tumbling after another.

It goes like this:

1) lockdown,

2) loss of moral compass and spreading of loneliness and nihilism,

3) rioting resulting from citizen frustration, 4) police absent because of ideological hectoring,

5) a rise in uncontrolled immigration/refugees,

6) an epidemic of ill health from substance abuse and otherwise,

7) businesses flee the city

8) cities fall into decay, and that results in

9) more surveillance and police state.

The 10th stage is the sacking of liberty and civilization itself.

It doesn’t fall out this way at every point in history, but this seems like a solid outline of what happened in this case. Four years is a very short period of time to see all of this unfold. But it is a fact that New York City was more-or-less civilized only four years ago. No one could have predicted that it would come to this so quickly.

But once the lockdowns happened, all bets were off. Here we had a policy that most directly trampled on all freedoms that we had taken for granted. Schools, businesses, and churches were slammed shut, with various levels of enforcement. The entire workforce was divided between essential and nonessential, and there was widespread confusion about who precisely was in charge of designating and enforcing this.

It felt like martial law at the time, as if all normal civilian law had been displaced by something else. That something had to do with public health, but there was clearly more going on, because suddenly our social media posts were censored and we were being asked to do things that made no sense, such as mask up for a virus that evaded mask protection and walk in only one direction in grocery aisles.

Vast amounts of the white-collar workforce stayed home—and their kids, too—until it became too much to bear. The city became a ghost town. Most U.S. cities were the same.

As the months of disaster rolled on, the captives were let out of their houses for the summer in order to protest racism but no other reason. As a way of excusing this, the same public health authorities said that racism was a virus as bad as COVID-19, so therefore it was permitted.

The protests had turned to riots in many cities, and the police were being defunded and discouraged to do anything about the problem. Citizens watched in horror as downtowns burned and drug-crazed freaks took over whole sections of cities. It was like every standard of decency had been zapped out of an entire swath of the population.

Meanwhile, large checks were arriving in people’s bank accounts, defying every normal economic expectation. How could people not be working and get their bank accounts more flush with cash than ever? There was a new law that didn’t even require that people pay rent. How weird was that? Even student loans didn’t need to be paid.

By the fall, recess from lockdown was over and everyone was told to go home again. But this time they had a job to do: They were supposed to vote. Not at the polling places, because going there would only spread germs, or so the media said. When the voting results finally came in, it was the absentee ballots that swung the election in favor of the opposition party that actually wanted more lockdowns and eventually pushed vaccine mandates on the whole population.

The new party in control took note of the large population movements out of cities and states that they controlled. This would have a large effect on voting patterns in the future. But they had a plan. They would open the borders to millions of people in the guise of caring for refugees. These new warm bodies would become voters in time and certainly count on the census when it came time to reapportion political power.

Meanwhile, the native population had begun to swim in ill health from substance abuse, widespread depression, and demoralization, plus vaccine injury. This increased dependency on the very institutions that had caused the problem in the first place: the medical/scientific establishment.

The rise of crime drove the small businesses out of the city. They had barely survived the lockdowns, but they certainly could not survive the crime epidemic. This undermined the tax base of the city and allowed the criminals to take further control.

The same cities became sanctuaries for the waves of migrants sacking the country, and partisan mayors actually used tax dollars to house these invaders in high-end hotels in the name of having compassion for the stranger. Citizens were pushed out to make way for rampaging migrant hordes, as incredible as this seems.

But with that, of course, crime rose ever further, inciting citizen anger and providing a pretext to bring in the police state in the form of the National Guard, now tasked with cracking down on crime in the transportation system.

What’s the next step? It’s probably already here: mass surveillance and censorship, plus ever-expanding police power. This will be accompanied by further population movements, as those with the means to do so flee the city and even the country and leave it for everyone else to suffer.

As I tell the story, all of this seems inevitable. It is not. It could have been stopped at any point. A wise and prudent political leadership could have admitted the error from the beginning and called on the country to rediscover freedom, decency, and the difference between right and wrong. But ego and pride stopped that from happening, and we are left with the consequences.

The government grows ever bigger and civil society ever less capable of managing itself in large urban centers. Disaster is unfolding in real time, mitigated only by a rising stock market and a financial system that has yet to fall apart completely.

Are we at the middle stages of total collapse, or at the point where the population and people in leadership positions wise up and decide to put an end to the downward slide? It’s hard to know. But this much we do know: There is a growing pocket of resistance out there that is fed up and refuses to sit by and watch this great country be sacked and taken over by everything it was set up to prevent.

Tyler Durden Sat, 03/09/2024 - 16:20

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Low Iron Levels In Blood Could Trigger Long COVID: Study

Low Iron Levels In Blood Could Trigger Long COVID: Study

Authored by Amie Dahnke via The Epoch Times (emphasis ours),

People with inadequate…

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Low Iron Levels In Blood Could Trigger Long COVID: Study

Authored by Amie Dahnke via The Epoch Times (emphasis ours),

People with inadequate iron levels in their blood due to a COVID-19 infection could be at greater risk of long COVID.

(Shutterstock)

A new study indicates that problems with iron levels in the bloodstream likely trigger chronic inflammation and other conditions associated with the post-COVID phenomenon. The findings, published on March 1 in Nature Immunology, could offer new ways to treat or prevent the condition.

Long COVID Patients Have Low Iron Levels

Researchers at the University of Cambridge pinpointed low iron as a potential link to long-COVID symptoms thanks to a study they initiated shortly after the start of the pandemic. They recruited people who tested positive for the virus to provide blood samples for analysis over a year, which allowed the researchers to look for post-infection changes in the blood. The researchers looked at 214 samples and found that 45 percent of patients reported symptoms of long COVID that lasted between three and 10 months.

In analyzing the blood samples, the research team noticed that people experiencing long COVID had low iron levels, contributing to anemia and low red blood cell production, just two weeks after they were diagnosed with COVID-19. This was true for patients regardless of age, sex, or the initial severity of their infection.

According to one of the study co-authors, the removal of iron from the bloodstream is a natural process and defense mechanism of the body.

But it can jeopardize a person’s recovery.

When the body has an infection, it responds by removing iron from the bloodstream. This protects us from potentially lethal bacteria that capture the iron in the bloodstream and grow rapidly. It’s an evolutionary response that redistributes iron in the body, and the blood plasma becomes an iron desert,” University of Oxford professor Hal Drakesmith said in a press release. “However, if this goes on for a long time, there is less iron for red blood cells, so oxygen is transported less efficiently affecting metabolism and energy production, and for white blood cells, which need iron to work properly. The protective mechanism ends up becoming a problem.”

The research team believes that consistently low iron levels could explain why individuals with long COVID continue to experience fatigue and difficulty exercising. As such, the researchers suggested iron supplementation to help regulate and prevent the often debilitating symptoms associated with long COVID.

It isn’t necessarily the case that individuals don’t have enough iron in their body, it’s just that it’s trapped in the wrong place,” Aimee Hanson, a postdoctoral researcher at the University of Cambridge who worked on the study, said in the press release. “What we need is a way to remobilize the iron and pull it back into the bloodstream, where it becomes more useful to the red blood cells.”

The research team pointed out that iron supplementation isn’t always straightforward. Achieving the right level of iron varies from person to person. Too much iron can cause stomach issues, ranging from constipation, nausea, and abdominal pain to gastritis and gastric lesions.

1 in 5 Still Affected by Long COVID

COVID-19 has affected nearly 40 percent of Americans, with one in five of those still suffering from symptoms of long COVID, according to the U.S. Centers for Disease Control and Prevention (CDC). Long COVID is marked by health issues that continue at least four weeks after an individual was initially diagnosed with COVID-19. Symptoms can last for days, weeks, months, or years and may include fatigue, cough or chest pain, headache, brain fog, depression or anxiety, digestive issues, and joint or muscle pain.

Tyler Durden Sat, 03/09/2024 - 12:50

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February Employment Situation

By Paul Gomme and Peter Rupert The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000…

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By Paul Gomme and Peter Rupert

The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000 average over the previous 12 months. The payroll data for January and December were revised down by a total of 167,000. The private sector added 223,000 new jobs, the largest gain since May of last year.

Temporary help services employment continues a steep decline after a sharp post-pandemic rise.

Average hours of work increased from 34.2 to 34.3. The increase, along with the 223,000 private employment increase led to a hefty increase in total hours of 5.6% at an annualized rate, also the largest increase since May of last year.

The establishment report, once again, beat “expectations;” the WSJ survey of economists was 198,000. Other than the downward revisions, mentioned above, another bit of negative news was a smallish increase in wage growth, from $34.52 to $34.57.

The household survey shows that the labor force increased 150,000, a drop in employment of 184,000 and an increase in the number of unemployed persons of 334,000. The labor force participation rate held steady at 62.5, the employment to population ratio decreased from 60.2 to 60.1 and the unemployment rate increased from 3.66 to 3.86. Remember that the unemployment rate is the number of unemployed relative to the labor force (the number employed plus the number unemployed). Consequently, the unemployment rate can go up if the number of unemployed rises holding fixed the labor force, or if the labor force shrinks holding the number unemployed unchanged. An increase in the unemployment rate is not necessarily a bad thing: it may reflect a strong labor market drawing “marginally attached” individuals from outside the labor force. Indeed, there was a 96,000 decline in those workers.

Earlier in the week, the BLS announced JOLTS (Job Openings and Labor Turnover Survey) data for January. There isn’t much to report here as the job openings changed little at 8.9 million, the number of hires and total separations were little changed at 5.7 million and 5.3 million, respectively.

As has been the case for the last couple of years, the number of job openings remains higher than the number of unemployed persons.

Also earlier in the week the BLS announced that productivity increased 3.2% in the 4th quarter with output rising 3.5% and hours of work rising 0.3%.

The bottom line is that the labor market continues its surprisingly (to some) strong performance, once again proving stronger than many had expected. This strength makes it difficult to justify any interest rate cuts soon, particularly given the recent inflation spike.

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