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Goldman picks 5 stocks to challenge FAAMG as growth darlings

Look out FAAMG, here comes VAPIN.

Analysts with Goldman Sachs identified a number of stocks that could come to rival the S&P 500's mega-caps Facebook Inc., Apple Inc., Inc., Microsoft Corp. and Google parent Alphabet Inc. as future index leaders. Those mega-caps, known as FAAMG, account for about 23% of the S&P 500's capitalization and have returned roughly 40% year-to-date, compared to the index average of about 5%.

The Goldman analysts named 21 companies poised to be index leaders. Among those, the analysts said, five companies stand out as having especially strong growth prospects: Vertex Pharmaceuticals Inc., Autodesk Inc., PayPal Holdings Inc., Intuitive Surgical Inc. and ServiceNow Inc.

These five stocks, which could be collectively abbreviated VAPIN, are in the healthcare and information technology sectors, and all have "large total addressable markets and high barriers to entry," said the analysts, led by David Kostin, Goldman’s chief U.S. equity strategist.

Intuitive Surgical, for example, had a 92% share of the US robotic surgery market and nearly 100% of the soft-tissue robotic surgery market in 2019.

While Goldman analysts forecast the company’s market share to decline to 70%, there are "strong barriers to entry given the highly specialized nature of the field."

"Johnson & Johnson and Medtronic PLC have both experienced multiple and noteworthy delays in attempting to enter this market," the analysts wrote.

The VAPIN stocks all have high projected earnings and revenues. Their median long-term projected EPS growth of 35%, compared to the S&P 500 projected median of 8%.

Goldman analysts forecast Intuitive Surgical to grow earnings at an 11% compound annual growth rate through 2024. Autodesk, a software platform provider, is forecast for 16% revenue growth. ServiceNow, an IT service management company, is forecast to see 25% annual growth. PayPal, a digital payment provider, is forecast to see 19% growth. Vertex, a pharmaceutical company that specializes in cystic fibrosis drugs, is forecast for 20% growth.

These five companies were among 21 high-growth stocks highlighted in the note with the potential to lead the S&P 500. All the stocks identified had track records of "outperformance," with 10% or more in sales growth over the past two years and expectations of 10% or more revenue growth over the next two years.

"These stocks will not necessarily supplant the 'current five' largest companies," the analysts wrote. "But they have the potential to significantly increase their rankings and in the process generate strong returns for portfolio managers owning the shares."

The companies listed mostly fell into five specialties: computerization of healthcare, digital transformation of business, workflow automation, e-commerce and digital payments, and advancements in life sciences.