In this piece, we will take a look at the ten best aggressive growth stocks to buy according to hedge funds.
If you’re putting money in the stock market, it’s more likely than not that growth is the thing that’s on your mind. After all, protecting against inflation doesn’t require making risky bets in firms that might see share prices drop in the blink of an eye. Financial instruments, such as inflation protected securities, offer investors the comfort of knowing that their savings do not lose value, meaning that passive income or growth remain some of the most popular reasons why people put their faith in stocks.
When it comes to identifying growth stocks, there are several approaches that are followed. These depend on the business model and the fundamentals of the firms being analyzed. For instance, for profitable companies with a positive net income, the price to earnings ratio is used. However, a large portion of high growth stocks aren’t profitable as they reinvest their revenue into expanding market share. This leads to high operating costs, and these firms are valued either through the EV/Sales or EV/EBITDA ratios, depending on whether the firm generates a positive operating income or not.
Both the P/E and other ratios tell us the premium that the market is placing over a firm’s ability to generate money. For instance, one of the major semiconductor companies in the world, which ranks 6th on our list of Top 10 Trending AI Stocks on Latest Analyst Ratings and News, had a P/E ratio of 112x by the end of Q1 2018. This was before the age of AI, and its two peers in the chip industry had 37x for the chip stock that’s Wall Street’s AI darling and 19x for the struggling American chip giant that’s also the only leading edge US based chip manufacturer. Safe to say, the 112x P/E foretold the story of times to come, and since Q1 2018, the stock has gained a whopping 1,386%.
Of course, this stock’s story isn’t the only aggressive growth stock story that we have. While its revenue has grown by 254% between 2018 and 2023, one of the best stories of an aggressive growth stock of our age is Elon Musk’s electric vehicle company. The firm had a stunning P/E ratio of 1,120x by the close of 2020 at a time when the retail investing frenzy was at a feverish pitch. Its first profitable quarter, i.e. the quarter ending in June 2020 saw its P/E jump to 512x at a time when its larger and traditional rival was trading at 23.89x. Since then, the shares have gained 180%, and their gains have been trimmed due to the turmoil in the EV industry stemming from supply chain constraints, margin eroding fierce competition, and high interest rates. The stock’s all time returns sit at 17,569%.
Shifting gears, the electric vehicle company had an EV/Revenue ratio of 23.56x in August 2012. Similar ratios are typically common in the cloud computing and software as a service (SaaS) industry. As opposed to car manufacturers that face high manufacturing and indirect costs, cloud and SaaS firms reap the benefits of a low cost business model as it takes less money to develop software than to operate an industrial plant. This also means that the firms have more cash at their disposal to focus on growth, and the low margins coupled with the high reinvestment have a direct implication on their valuation.
Looking at the SaaS sector’s median EV/Revenue multiples, data shows that they are affected by interest rates. Higher interest rates increase the opportunity cost of investing in the stock market, and they also decrease the value of future SaaS earnings in today’s dollars as investors can earn more money today through interest. This is also evident in the data, as before the pandemic, the median EV/Revenue multiple was 11x. After the pandemic, when the Federal Reserve was forced to lower rates to nearly zero to avoid economic destruction, the SaaS median EV/Revenue multiple shot to 20x in 2021 as investors found little utility in earning money through interest.
Now, when the rates are at historic highs, the median multiple over the past 18 months has hovered around 7x. The post pandemic economic disruption has also had an effect on SaaS growth, since pre pandemic, the median revenue growth rate for these firms was 30%, and in the low rate era as the demand for technology services boomed, it grew to 33%. However, the high rates after that, which slowed down business spending, have also impacted the revenue growth rate which is around 17% as of Q1.
Building on this, the SaaS and the broader software industry are also dealing with the impacts of AI. Among the use cases of the new technology is programming, with research from the hedge fund Coatue Management sharing some key insights. Its research shows that high rates might not be the only reason for the sector that’s historically been thought to have constituted the highest number of aggressive growth stocks. As per Coatue, compared to a peak value of 30%, the median next twelve month revenue growth rate for the SaaS sector right now is just 1%. This appears to be influenced by AI’s impact, as not only has AI reduced the cost of writing code (meaning that SaaS customers can use AI to make their own software) but it is also impacting the traditional seat based model of the industry. This model sees SaaS firms charge customers on the basis of the number of people or ‘seats’ that have access to their software, and the seat model is now being replaced by consumption driven models.
This transition is already playing out in the industry, with one software firm sharing during its Q2 2024 earnings call:
“Subscription revenue was $278.1 million, a 21% increase over last year. Now, with the transition that we went through to pay-as-you-go consumption pricing, we are engaging in a much larger number of smaller transactions of shorter term. This offers us greater revenue visibility and greater revenue predictability. Our average TCV [TOTAL CONTRACT VALUE] has plummeted as a result from over $16 million in fiscal year ’19 to $900,000 last quarter. As we work through this pricing transition, we are seeing, as expected, okay, at first a decline and now a return to accelerating revenue growth. Also as expected, we are seeing a reduction in RPO.”
So, as the aggressive growth stock sector appears to be evolving, we decided to see which such stock hedge funds are buying.
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Our Methodology
To make our list of the best aggressive growth stocks to buy, we first ranked the 155 stock holdings of a popular ETF that selects stocks based on the belief that their earnings will grow faster than the average. Then, out of this list, those stocks with a 30%+ annual revenue growth rate during the latest quarter were chosen. These stocks were ranked by the number of hedge funds that had bought the shares during Q2 2024 and the top stocks were chosen.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10. Alnylam Pharmaceuticals, Inc. (NASDAQ:ALNY)
Revenue Growth: 107%
Number of Hedge Fund Investors In Q2 2024: 53
Alnylam Pharmaceuticals, Inc. (NASDAQ:ALNY) is a mid sized biotechnology company headquartered in Cambridge, Massachusetts. It is a commercial stage biotechnology company that sells drugs that help treat faulty protein build up (hereditary transthyretin amyloidosis (hATTR))in the heart or the nerves. However, most of Alnylam Pharmaceuticals, Inc. (NASDAQ:ALNY)’s valuation right now is dependent on the firm’s AMVUTTRA drug which is currently used to treat hATTR. Alnylam Pharmaceuticals, Inc. (NASDAQ:ALNY) revealed the results of a phase three AMVUTTRA trial earlier this year for patients who suffer from cardiomyopathy due to a TTR imbalance. The trial demonstrated a 36% improvement in mortality, and Alnylam Pharmaceuticals, Inc. (NASDAQ:ALNY) was due to present more data for the drug at the European cardiology conference at end August. The new data saw AMVUTTRA reduce the risk of death by 31%. However, investors were looking for aggressive results, and as the risk reduction fell below their expectations of 32%, the stock dropped by 8.5%. Alnylam Pharmaceuticals, Inc. (NASDAQ:ALNY) benefits from an already established AMVUTRA supply chain, which means that if it receives additional FDA approval for the drug then it could easily scale production and grow revenue.
Alnylam Pharmaceuticals, Inc. (NASDAQ:ALNY)’s management commented on its industrial partnerships and commercialization efforts during the Q2 2024 earnings call:
“Our partners continue to make great progress as well. Sanofi submitted regulatory filings for vutrisiran for patients with hemophilia in China, Brazil, and the United States, where the FDA has set a target action date of March 28, 2025. We’ve also announced today a pair of updates to our ongoing collaboration with Regeneron. First, we amended the license agreement for cemdisiran, investigational RNA therapeutic in development for the treatment of complement-mediated diseases under which Regeneron gained exclusive rights to the asset as a monotherapy. In exchange, we received a $10 million upfront payment and are eligible to receive certain regulatory milestones and low double-digit royalties on sales, if approved. Additionally, as part of their regular portfolio review and prioritization efforts, Regeneron has decided to opt out of further co-development and co-commercialization of mivelsiran.
As such, we now have full global development and commercialization rights to mivelsiran in all indications.”
9. Roblox Corporation (NYSE:RBLX)
Revenue Growth: 31.30%
Number of Hedge Fund Investors In Q2 2024: 54
Roblox Corporation (NYSE:RBLX) is one of the few pureplay virtual reality software companies that operates an immersive platform for users and one where software developers can also provide their products. The social media esque nature of its business means that Roblox Corporation (NYSE:RBLX)’s hypothesis is dependent on its users and monetization capabilities. Since the platform is a cyclical product, Roblox Corporation (NYSE:RBLX) stands to increase its monetization when consumers have higher discretionary spending. Investors measure user engagement through Daily Active Users (DAUs) and spending through bookings, which measure the in game spending for users. Given the high standards set by social media giants, Roblox Corporation (NYSE:RBLX) has to aggressively grow its market or risk falling out of favor with investors. The shares are down 67% since their coronavirus peak since investors moved away from stocks that benefited from lockdown mandates. Roblox Corporation (NYSE:RBLX)’s stock did gain roughly 3% in September when management shared plans to grow users by teaming with Apple and Google among others. This indicated the criticality of growth for its hypothesis.
Artisan Partners mentioned Roblox Corporation (NYSE:RBLX) in its Q2 2024 investor letter. Here is what the firm said:
“Roblox is an online platform where users both play games created by other users and create their own games using Roblox Studio, a robust suite of development and coding tools. While the graphics, user interface and general gameplay appeals more to younger people, our thesis focused on the company’s investing heavily to improve its technological capabilities so it could provide experiences that appeal to an older demographic. We saw a potential bull case of Roblox becoming a leading place to create and consume social 3D experiences for the general population. Unfortunately, that view has not materialized as fundamentals have slowed. We exited the position.”