Strategy profile

High-Growth / Rule of 40: Current Backtest & Top Stocks 2026

The stress test for technology growth stocks: revenue growth plus free-cash-flow margin must reach at least 40 combined, automated across the entire technology sector.

Save the strategy and StockScorer checks its rules for you every day. You'll get a heads-up whenever a stock crosses the upper or lower score threshold.

✓ Refreshed daily✓ Rule-based: no black box✓ Fully customisable
Total return in the backtest10 years to Q2 2026
Strategy
+383.2%
MSCI World
+240.1%

Gap to MSCI World: +143.0 percentage points total, +4.0 per year

60202343485626StartQ2 2017Q3 2018Q4 2019Q1 2021Q2 2022Q3 2023Q4 2024Q2 2026StrategyBenchmark (MSCI World)

Index, start = 100

Past performance is not a reliable indicator of future results.

+17.1%Return p.a. (backtest)
+4.0 ppvs. MSCI World p.a.
16,182Stocks analysed
SmallMidLargeCap classes
Classification of all stocks as of the latest data

What the profile looks like today

As of 11/15/2026
205High
200Medium
568Low
Classification in the universe
High 1%Medium 1%Low 4%Not rated 94%

Based on all 16,182 stocks with a score. Not rated are stocks that the profile does not classify because of a size limit or an exclusion rule.

Distribution of scores in the market
-5
-4
-3
-2
-1
0
+1
+2
+3
+4
Score distribution as a data table
ScoreNumber of stocksHigh matchMedium matchLow matchNot rated
-54,054002023,852
-400000
-34900032458
-23,929001363,793
-100000
03,198001983,000
+11,995020001,795
+200000
+36809300587
+41,836112001,724
Countries of the high-match stocks
US 45%IN 10%KR 10%CN 10%PL 5%Other 20%
How rules turn into a score

How the scoring works

Every stock runs through the same disclosed rules. The points add up to a score, traceable down to the individual rule.

01
Rules

Each rule checks a metric against a threshold, here for example “Hypergrowth with high efficiency (growth + FCF margin ≥ 50)”.

02
Points & weighting

In this profile, each rule that is met counts +1 to +4 or −2 to −3 points. Exclusion rules take a stock out of the rating regardless of its points: it is then not rated.

03
Score & classification

The sum is the score. That gives three classes: high, medium, low match.

Low match
< 1 points
Medium match
1 – 2 points
High match
≥ 3 points

These terms describe only the match with the criteria, not a recommendation to buy or sell.

What the strategy measures a stock against

What is behind this strategy?

01
Is revenue growing fast enough?

Year-over-year revenue growth is the first half of the 40 sum.

02
Is the growth affordable?

The FCF margin shows whether growth generates or burns cash, the second half of the sum.

03
Does the combination suffice?

Only a sum of 40+ satisfies the rule; 25–40 counts as healthy, below 10 as a warning sign.

04
Is the business shrinking?

Negative revenue growth costs 3 points, the strategy's harshest deduction.

Excerpt from the rule profile

These exact rules run over every stock daily.

4 of 7 rules
Software industries only (the Rule of 40 is calibrated for SaaS business models)+0 ptsExclusion
Revenueisat least50000000+0 ptsExclusion
Revenue Growth YoY + FCF Marginisat least50+4 pts
Group:AND
+3 pts
Revenue Growth YoY + FCF Marginisat least40
Revenue Growth YoY + FCF Marginisless than50
All of these conditions must be met
+ 3 more rules in the profile

After signing up for free, you can copy the full profile in the rule editor, adjust its thresholds, and save it as your own starting profile.

See and copy all rules for free
What the backtest shows, and what it does not

How has the profile performed?

Strategy: +383.2%Benchmark (MSCI World): +240.1%
60202343485626StartQ2 2017Q3 2018Q4 2019Q1 2021Q2 2022Q3 2023Q4 2024Q2 2026StrategyBenchmark (MSCI World)

Index, start = 100

The backtest shows a total return of +383.2%. The MSCI World reaches +240.1% over the same period.

+17.1%Return p.a.
+13.0%Benchmark p.a.
-49.0%Largest decline
0.53Sharpe Ratio
Spread by start date

The same strategy with the same settings, started at every possible date. Each dot is a separate run over 5 years.

0%20%40%Start Q2 2016: 38.5% p.a., MSCI World 13.5% p.a.Start Q3 2016: 32.8% p.a., MSCI World 13.2% p.a.Start Q4 2016: 32.6% p.a., MSCI World 13.8% p.a.Start Q1 2017: 21.6% p.a., MSCI World 11.8% p.a.Start Q2 2017: 17.2% p.a., MSCI World 9.9% p.a.Start Q3 2017: 21.3% p.a., MSCI World 9.4% p.a.Start Q4 2017: 11.9% p.a., MSCI World 8.7% p.a.Start Q1 2018: 11.8% p.a., MSCI World 11.0% p.a.Start Q2 2018: 14.3% p.a., MSCI World 10.6% p.a.Start Q3 2018: 4.0% p.a., MSCI World 9.5% p.a.Start Q4 2018: 11.2% p.a., MSCI World 13.8% p.a.Start Q1 2019: 0.2% p.a., MSCI World 13.2% p.a.Start Q2 2019: 2.9% p.a., MSCI World 13.3% p.a.Start Q3 2019: 3.6% p.a., MSCI World 12.8% p.a.Start Q4 2019: 13.4% p.a., MSCI World 13.0% p.a.Start Q1 2020: 10.6% p.a., MSCI World 16.8% p.a.Start Q2 2020: 2.9% p.a., MSCI World 13.7% p.a.Start Q3 2020: -3.2% p.a., MSCI World 14.6% p.a.Start Q4 2020: -5.5% p.a., MSCI World 13.4% p.a.Start Q1 2021: -12.7% p.a., MSCI World 10.8% p.a.Start Q2 2021: -13.6% p.a., MSCI World 12.5% p.a.Q2 2016Q4 2018Q2 2021
  • Strategy
  • MSCI World
  • Median 11.2%
Median
11.2%
Mean
10.3%
Range
-13.6% to 38.5%
Standard deviation
14.1 percentage points
Ahead of MSCI World
10 of 21 runs

The periods overlap heavily, neighbouring runs share almost all periods. The spread therefore looks smaller than it would for independent periods. Past results say nothing about future ones.

Strategy calculated without fees and taxes, dividends reinvested.

Point-in-time composition since June 30, 2009: each period uses the members at that time. Stocks that left the market early may be missing, which favours the result.

Historical period, quarterly rebalancing. Past performance is not a reliable indicator of future results.

Which stocks fit best today

Stocks with a High Match

Purely mechanical rule application, no curated-list effect: stocks with a high match can fall just like any other stock.

P/E, P/B, ROE and equity ratio are already visible publicly per stock. After signing up for free, you'll see additional metrics such as margin and debt, plus the live score history.
The way of working this profile suits

Who is this strategy for?

For growth-oriented investors who want to weed out loss-makers without giving up momentum. The strategy is restricted by rule to software industries with at least €50 million in revenue, where the Rule of 40 is calibrated; outside it, an exclusion rule treats stocks as not applicable.

Adopt this strategy for free
What people usually ask before starting

Frequently asked questions

Why FCF margin instead of EBITDA margin?
The free-cash-flow margin is the harder currency: it accounts for investment and leaves less room for accounting discretion. If you prefer the softer EBITDA definition, you can switch the rule in the editor.
Does the Rule of 40 only apply to software companies?
Yes, it originated in the SaaS world, where it is most meaningful. The strategy is restricted by an exclusion rule to the software industries (the data doesn't support a finer SaaS-only cut than application/infrastructure software, IT services, internet content and gaming), and a second gate additionally requires at least €50 million in revenue, as Brad Feld suggests for the rule. Outside that, the filter treats a stock as not applicable.
Is this a recommendation to act?
No. StockScorer provides automated, rule-based assessments for information only. Nothing here replaces individual financial advice or constitutes a solicitation to buy or sell securities.
Can I change the 40 threshold?
Yes. After free registration you can copy the profile and freely adjust the sum formula and its tiers in the rule editor.

Method & Criteria

The Rule of 40 comes from the venture-capital world (popularised by investor Brad Feld in 2015) and is the established yardstick for software business models: heavy losses are acceptable as long as growth justifies them, and vice versa. StockScorer therefore applies it exclusively to the software industries via an exclusion rule (application and infrastructure software, IT services, internet content, gaming), no longer to the coarse technology sector, which would also sweep in hardware and semiconductors; outside these industries, a stock is treated as not applicable. A second gate requires at least €50 million in revenue: Feld formulates the rule explicitly for companies "at scale", not early-stage startups. It computes the sum of revenue growth (year over year) and FCF margin as a genuine arithmetic criterion. From 40 points the rule counts as met, from 50 as efficient hypergrowth. Shrinking revenue is punished drastically: a growth company that shrinks loses its reason to exist as a growth stock.

How does the Rule of 40 work?

Two exclusion rules bound the universe: software industries only (application and infrastructure software, IT services, internet content, gaming) and a minimum revenue of €50 million. At the core then sits a single arithmetic criterion: revenue growth (in %) plus FCF margin (in %). A sum of 50 or more earns +4 points, 40–50 +3, 25–40 +1. Below 10 (stagnation or cash burn without growth to compensate) costs 2 points, and shrinking revenue another 3.

That yields a range from −5 to +4 points. The upper threshold is a uniform 3 points across all size classes, reachable only if the Rule of 40 is genuinely met. A company with 30% growth and a −5% FCF margin (sum 25) stays in the middle zone: dynamic, but not yet efficient enough.

The point tiers at a glance

Universe gates: software industries only, and revenue ≥ €50 million (both exclusion rules).

Sum ≥ 50: hypergrowth with high capital efficiency (+4).

Sum 40–50: the golden Rule of 40 is met (+3).

Sum 25–40: healthy growth with mild inefficiencies (+1).

Sum below 10 or not computable: stagnation or cash burn (−2).

Revenue growth negative: strategic warning signal (−3).

Strengths and limits

Its strength is balancing the classic growth dilemma: pure revenue growth rewards cash burners, pure margin punishes investment in growth. The sum allows both, as long as the mix works.

Limits: since the 23 August 2026 fidelity round, an industry gate narrows the universe to software industries instead of the coarse technology sector, which also swept in hardware and semiconductors; the data still doesn't support a finer SaaS-only cut. Outside the industries, a stock counts as not applicable. Cyclical revenue jumps can also distort the sum in the short term, even within the universe; the cap thresholds are unified since the round, because the 40 line applies regardless of size.

Who is this strategy for?

For growth investors with an elevated volatility tolerance who only accept growth when it comes with capital efficiency.