9 Winning Stocks with Goldman Sachs' Rule of 10 and Morningstar Moat

Goldman Sachs chief U.S. equity strategist David Kostin and his team discovered that a select group of technology giants, referred to as the "Magnificent Seven" — Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Alphabet (GOOGL), Meta (META), Tesla (TSLA), and Nvidia (NVDA) — exhibited consistent revenue growth exceeding 10%, surpassing majority of the stocks in the S&P 500.

In light of this finding, the team devised the "Rule of 10" stock screen, aiming to identify the next wave of stocks capable of becoming bigger companies within the S&P 500. Alongside historical performance, Goldman Sachs projected these stocks to sustain a sales growth rate above 10% until 2025.

Investors who constructed a portfolio based on the "Rule of 10" in 2023 outperformed the S&P 500 by 2% and the equally-weighted S&P 500 by 12%.

Below are the 20 stocks that passed the "Rule of 10":

However, I would like to introduce an additional criterion to enhance our selection process. In order to bolster confidence in sustainable revenue growth beyond 2025, we can incorporate Warren Buffett's moat concept. By prioritizing stocks with a wide moat rating as evaluated by Morningstar, we can potentially identify a more robust set of stocks for further exploration. As our focus is primarily on revenue growth, I have included the historical price-to-sales (P/S) ratios to facilitate a simplified valuation process. Due diligence is still required.

The following list comprises nine names, arranged based on their projected revenue growth from slowest to highest:

#9 Salesforce (CRM)

Salesforce has demonstrated a remarkable track record of consecutive revenue growth over the past decade. Despite a gradual deceleration in the growth rate, the company achieved an impressive 18% revenue growth in 2022, surpassing the threshold set by the Rule of 10. According to projections from Goldman Sachs, Salesforce is anticipated to experience a further slowdown in growth, reaching 11% over the next two years.

Switching Costs:

• Salesforce.com's Sales Cloud, Service Cloud, Marketing Cloud benefit from high switching costs. Customers are reluctant to switch from these solutions due to the time, expense, and risk associated with implementing new applications, migrating data, and retraining the workforce.

Network Effect:

• Salesforce Platform and Other, including MuleSoft, leverage a network effect. As more customers adopt Salesforce.com's solutions, the AppExchange platform becomes increasingly attractive to developers, creating a virtuous cycle.

• The tight integration and complementary nature of Salesforce.com's various clouds contribute to the network effect. Customers value the complete set of solutions offered under one umbrella, and as they adopt multiple clouds, Salesforce.com becomes more deeply entrenched in their operations.

Valuation: Undervalued (Fair price ~$290)

Salesforce P/S Ratio - Screenshot from Tiger Brokers

#8 Starbucks (SBUX)

Starbucks has consistently achieved steady revenue growth with the exception of 2020, when it was impacted by the Covid-related lockdowns. For the majority of years, the company surpassed the 10% growth threshold. According to Goldman Sachs projections, Starbucks is expected to sustain an annual growth rate of approximately 11% until 2025.

Brand Strength:

• Pricing power and ability to push menu price increases and premium customized beverages.

• Strong average ticket price compared to peers.

• High cash-on-cash returns and attractive restaurant-level profitability.

• Successful international replication and brand recognition.

• Lower marketing spending relative to peers.

Cost Advantage:

• Global scale and centralized purchasing leading to procurement discounts. Durable cost advantage due to higher unit volumes.

• Operational leverage and cost savings through technology investments.

• Valuable data insights from the proprietary platform for targeted promotions and menu expansions.

Valuation: Undervalued (Fair price ~$116)

Starbucks P/S Ratio - Screenshot from Tiger Brokers

#7 Adobe (ADBE)

Adobe has exhibited remarkable revenue growth, surpassing the 20% mark in the majority of years over the past decade. However, according to Goldman Sachs projections, the growth rate is expected to moderate, settling at around 12% annually until 2025.

Switching Costs:

• Creative Cloud (Photoshop, Illustrator, Premiere Pro and more) is pervasive within the creative world and the educational system, making it difficult for users to switch to alternative solutions.

• Document Cloud's narrow moat is based on switching costs, as there are no truly competitive solutions to the PDF file format, and Acrobat Pro DC remains the gold standard in PDF editors.

Network Effects:

• Creative Cloud's widespread adoption and standardization within the creative world create a network effect.

• Creative professionals have a significant incentive to become well versed in Creative Cloud, which further perpetuates the positive flywheel effect.

Valuation: Undervalued (Fair price ~$592)

Adobe P/S Ratio - Screenshot from Tiger Brokers