Higher interest rates will be a defining characteristic of the markets next year and many high-quality stocks also have growth profiles that make them sensitive to rate changes, $Goldman Sachs(GS.US)$
In Goldman's equity outlook for 2022, Chief U.S. Equity Strategist David Kostin and team look at how investors need to look at what they call "duration" in growth.
Stocks with high revenue projections and low profit or negative margins have "long duration" and are vulnerable to increases in interest rates.
"Growth stocks with high profit margins outperformed unprofitable growth stocks when real rates jumped in 1Q 2021, and profitable stocks should remain resilient if rates rise in 2022," Kostin says.
"Stocks with valuations entirely dependent on future growth are vulnerable to a dramatic drop in price if rates rise sharply or revenue growth expectations are reduced," he says. "This latter risk was exemplified by the sharp underperformance of some notable high growth, low earnings companies following disappointing 3Q 2021 results and lowered forward revenue guidance."
Because interest rates are so low now, high-growth extremely profitable stocks trade at similar valuations to high-growth stocks with low profitability, he adds.
Goldman ran screens for strong revenue growth stocks with high and low margins. Both screens exclude Financials.
High margin stocks. $Russell 3000 Index Ishares(IWV.US)$
companies with market cap over $2B, consensus 2023 revenue growth over 15% and 2023 margins over 20%:
1. $Halozyme Therapeutics(HALO.US)$
, consensus sales CAGR 2021-23 is 30%, consensus 2023 profit margin is 63%
2. $Marathon Digital(MARA.US)$
, sales 105%, margin 51%
, sales 18%, margin 47%
4. $Riot Blockchain(RIOT.US)$
, sales 69%, margin 46%
5. $MP Materials(MP.US)$
, sales 50%, margin 45%
6. $United Therapeutics(UTHR.US)$
, sales 13%, margin 42%
7. $Aspen Technology(AZPN.US)$
, sales 13%, margin 41%
8. $Universal Display(OLED.US)$
, sales 20%, margin 38%
9. $Harmony Biosciences(HRMY.US)$
, sales 52%, margin 37%
10. $Marvell Technology(MRVL.US)$
, sales 20%, margin 35%
Low profit stocks. Russell 3000 companies with market cap above $5B, consensus 2023 revenue growth over 15% and 2023 net profit margins less than 5%:
, consensus sales CAGR 2021-23 40%, consensus 2023 net loss $722M, consensus 2023 margin -29%
, sales 62%, loss $694M, maring -24%
, sales 1,414%, loss $487M, margin -63%
4. $Guardant Health(GH.US)$
, sales 32%, loss $377M, margin -60%
5. $Lyft Inc(LYFT.US)$
, sales 31%, loss $330M, margin -6%
, sales 22%, loss $328M, margin -17%
, sales 29%, loss $254M, margin -29%
8. $Pacific Biosciences of California(PACB.US)$
, sales 41%, loss $250M, margin -96%
, sales 50%, loss $244M, margin -28%
10. $Oak Street Health(OSH.US)$
, sales 51%, loss $244M, margin -7%