In this piece, we will take a look at the 12 best aggressive growth stocks to buy according to hedge funds.
For a large portion of investors who put money in the market, growth is the primary objective. The stocks that these investors prefer are also stocks that are either currently exhibiting strong revenue growth or have product strengths or other competitive advantages that can ensure that they will dominate their markets and grow in the future.
Broadly speaking, it is possible to identify such stocks by looking at which industries are expected to grow strongly. A few years ago, semiconductor design and fabrication was one such sector. Back then, the world’s largest integrated chip manufacturer known for its Core processor lineup had started to struggle. The nature of the semiconductor industry which requires years of research expertise and billions of dollars in capital expenditure meant that the market was not only open to new players but also that this opening favored incumbents that already had the necessary investments and expertise in place.
This gap led to the price-to-earnings (P/E) ratio of the firm which ranked 3rd on our list of 10 AI Stocks That Will Skyrocket to touch astronomically high levels as soon as the firm started to turn a profit. As an illustration, consider the P/E ratio of this stock at Q1 2018’s close. The ratio back then was 111, while the integrated chip manufacturer was trading at 19 and the Taiwanese contract chip manufacturer which ranks 2nd on our list of 10 Best Tech Stocks For Long-Term Investment traded at 16.11. During the same period, Wall Street’s favorite AI GPU stock whose shares have gained 700%+ since OpenAI publicly released ChatGPT was trading at a P/E ratio of 37.
Naturally, this indicated that investors were betting heavily on the firm to grow. Since 2018’s first quarter, its shares have gained a whopping 1,204% while the GPU company has gained 2,175% and the integrated chip manufacturer is down by 57.6%. Between its fiscal years 2017 to the latest trailing-twelve-month revenue, the growth stock that traded at a P/E ratio of 111 in 2018 has grown revenue by 358%, so it’s safe to say that in this case, growth investors were right, and their investments if dearly held since then have outpaced the firm’s revenue in growth terms.
Therein lies the magic of growth stocks, which can generate substantial returns for investors. However, as is the case with all things in life, this promise also comes with a dark side. Research from the University of Michigan shows that growth stocks are punished harder than value stocks in case of negative earnings surprises. For their research, the researchers analyzed consensus earnings forecasts, quarterly share prices, stock prices, P/E ratios, and other variables for 13 years to determine the returns of growth and value stocks that missed or beat analyst earnings estimates.
By bifurcating their results across five categories starting from Low Growth and ending at High Growth, they demonstrate a clear difference between the post-earnings stock returns of growth and non-growth stocks. For the Low Growth stocks, a negative earnings surprise led to -3.57% in share price returns starting two days following the report and ending before the next report. The High Growth stocks led the Low Growth stocks by 3.75 percentage points in negative returns as they lost 7.32% over the same period after posting a negative earnings surprise. The 3.75 percentage point differential is key when we analyze these two categories’ stock price performance after positive earnings surprises. This is because while the Low Growth stocks gained 5.44% after the earnings surprise, the High Growth stocks led them by only 0.88 percentage points by gaining 6.32%.
Similarly, not only are growth stocks punished harder if they miss investor expectations, but the share price drops can make earlier optimism regarding their fortunes appear misplaced as well. The best example of this fact is the software-as-a-service (SaaS) industry. SaaS firms were the pinnacle of growth investing because of their business model which allows them to earn recurring revenue through sizable contracts while keeping costs low. Investor optimism surrounding SaaS stock touched a feverish pitch in Q1 2021 when their median EV/Revenue multiple sat at 14.1x. This meant that the firms’ market capitalization and debt minus cash and other assets were valued 14 times their sales. But, by Q4 2022 this had dropped to 4.6x as a combination of factors such as higher rates leading to tighter business spending and the pivot towards artificial intelligence soured sentiment. SaaS firms were particularly hurt since AI enables businesses to self-develop software which reduces the need for SaaS products and services.
So, with the landscape surrounding growth stocks being as dynamic as their share prices, we decided to look at some aggressive growth stocks with high revenue growth and significant hedge fund interest.
A trader at a stock exchange, vigorously watching the stocks’ trends in the stock market.
Our Methodology
To compile our list of the best aggressive growth stocks, we first sifted out 12 stocks with annual latest quarter revenue growth greater than 35% from multiple growth ETFs. The stocks were then ranked by the number of hedge funds that had bought the shares during Q3 2024.
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).
12. Symbotic Inc. (NASDAQ:SYM)
Revenue Growth: 57.7%
Number of Hedge Fund Investors In Q3 2024: 15
Symbotic Inc. (NASDAQ:SYM) is an artificial intelligence company that specializes in machine learning. The firm caters to the needs of the logistics and warehousing industry through products such as warehouse process automation. Symbotic Inc. (NASDAQ:SYM)’s target sector introduces seasonality into its earnings and places it at the mercy of the broader economy. Warehouse stocks tend to do well when economic output and consumer spending are high. Consequently, the fact that Symbotic Inc. (NASDAQ:SYM)’s shares are down 44% year-to-date is unsurprising given that industrial and other economic sectors have lagged this year. However, the firm benefits from being one of the few players of its kind, which is evident through its backlog of $22.4 billion despite a broader industrial slowdown. Symbotic Inc. (NASDAQ:SYM) also benefits from having no debt on its balance sheet which frees up considerable cash flow for operations and other purposes and a partnership with retail giant Walmart to introduce certainty into future cash flows.
Symbotic Inc. (NASDAQ:SYM)’s management commented on its backlog during the Q4 2024 earnings call. Here is what they said:
“Turning to backlog. Our backlog of committed contracted orders of $22.4 billion remained largely consistent with last quarter as the revenue recognized during the quarter was partially offset by final pricing on contracts already in the lane. I will note that Walmex was signed after the quarter end and will be additive to the backlog next quarter. As mentioned earlier, system margins rebounded strongly, returning to historical levels. Gross margin on software maintenance and support is up 50% for the quarter, trending towards typical industry softness as more systems go operational. In operation services, we did experience a slight negative gross margin as we added resources at certain sites where we have large projects and are adding new capabilities.”
11. Ares Management Corporation (NYSE:ARES)
Revenue Growth: 68.30%
Number of Hedge Fund Investors In Q3 2024: 24
Ares Management Corporation (NYSE:ARES) is a California-based asset management company. The firm has a global presence, and it operates through products and services such as investment funds, private equity, and real estate. Ares Management Corporation (NYSE:ARES)’s strong revenue growth is built on the back of the growth in private credit in the finance industry. This has come on the back of tighter regulations for bank lending as well as high rates and a large number of entities not qualifying for traditional finance. Ares Management Corporation (NYSE:ARES)’s favorability to entities that prefer to avoid bank financing also positions it well to navigate a low-rate environment. Not only do lower rates increase demand for private credit, but they also increase the value of rate-sensitive assets and bolster the real estate sector. The firm’s shares reflect these factors, as the shares are up 54% year-to-date.
ClearBridge Investments mentioned Ares Management Corporation (NYSE:ARES) in its Q3 2024 investor letter. Here is what the fund said:
“We took action in the quarter to shore up our financials exposure with two new buys in the sector. Ares Management Corporation (NYSE:ARES) is an alternative asset manager and leading player in private credit, a large and growing market that continues to be supported by secular tailwinds such as increased bank regulation, rising retail penetration and the migration of insurance assets. With its scale, Ares should take outsize share of industry asset growth and drive fee-related earnings and margin expansion over time. The company’s high underwriting standards and performance in past downturns position it well to not only manage through a future credit cycle but also emerge stronger versus peers.”
