Below we present the list of 5 Small-Cap Growth Stocks Hedge Funds Love. For our methodology and a more comprehensive list please see 10 Small-Cap Growth Stocks Hedge Funds Love.
5. Penn National Gaming, Inc. (NASDAQ:PENN)
Number of Hedge Fund Shareholders: 37
Kicking off the second part of this list is Penn National Gaming, Inc. (NASDAQ:PENN), in which hedge fund ownership more than doubled between Q1 and Q3 of 2020. Ownership of the stock has since dipped by 20% as more investors grow concerned about the losses in its digital business. Jim Simons’ Renaissance Technologies owns 1.79 million PENN shares as of March 31.
Penn National Gaming, Inc. (NASDAQ:PENN) has a large footprint across the North American gambling landscape, owning 44 casinos, in addition to running online sports betting operations in 13 states and online casino operations in five. Industry-wide gaming revenue growth slowed considerably in June, as revenue reported by casinos, racetracks, and their partners grew by 2.2% year-over-year to $401.5 million during the month. Through June, the year-to-date growth rate stands at a much more impressive 15.2%. PENN shares trade at the most reasonable levels they have in some time, including at just 1.55x book value and 1.05x sales, their lowest levels since 2019.
The Baron Focused Growth Fund had this to say about Penn National Gaming, Inc. (NASDAQ:PENN)’s poor Q1 performance on the stock market in its Q1 2022 investor letter:
“Penn declined 18.2% in the quarter and penalized performance by 54 basis points. This was due to investor concerns over continuing losses from its Barstool business. We believe the $50 million of losses this year from its digital business is modest in relation to Penn’s $1 billion of brick and mortar EBITDA. The losses from its digital business represent customer acquisition costs incurred as additional states legalize online gambling. Since it is far less expensive to retain existing customers than to acquire new ones, we expect marketing costs to decline as Penn builds its customer base. Penn’s core bricks and mortar casino business remains strong, and the company has a healthy regional casino business and a strong balance sheet to fund digital losses.”
4. Chegg, Inc. (NYSE:CHGG)
Number of Hedge Fund Shareholders: 40
Chegg, Inc. (NYSE:CHGG) ranks fourth on the list of small-cap growth stocks hedge funds like, though that could change once the Q2 data is available, as the only two funds that have filed on CHGG so far both sold out of their positions. Nonetheless, Chegg has the support of several major hedge funds, including Fir Tree, founded by Jeffrey Tannenbaum, and John Overdeck and David Siegel’s Two Sigma Advisors.
It was reported in May that Byju’s was considering the acquisition of either Chegg, Inc. (NYSE:CHGG) or 2U, Inc. (NASDAQ:TWOU), with the company reportedly in talks to buy the former. The market wasn’t overly enthused about the prospect, perhaps given that Byju’s had secured just $2.4 billion in financing for a deal, while CHGG was already valued at $2.2 billion. It now appears that Byju’s has pivoted to 2U, which makes more sense given that company’s smaller size.
The Artisan Mid Cap Fund believes Chegg, Inc. (NYSE:CHGG)’s U.S penetration has become relatively mature, which bolsters the need for strong international expansion for the stock to do well going forward. It had this to say about CHGG in its Q4 2021 investor letter:
“Short-term market dynamics aside, we did experience several disappointing profit cycle developments during the quarter, Chegg and Roku in particular. Chegg is a digital education platform. A pattern of steady long-term growth in US subscribers surprisingly came to an end when it reported Q3 results. This precipitated a sharp decline in the company’s valuation and our estimate of its private market value (PMV). Management cited factors such as fewer enrollees in 2-year colleges (lured into the workforce by higher wages) and less need for study aides as COVID-related pressures have resulted in students taking less-challenging courses and professors assigning lighter workloads. We view these explanations as mostly logical, but we also believe US penetration of the company’s services has become relatively mature. These headwinds could persist for at least the next few quarters, and we are currently evaluating whether other long-term growth drivers—international subscriber growth, new services—remain intact. Meanwhile, it represents a very small GardenSM position in our portfolio.”
3. Boyd Gaming Corporation (NYSE:BYD)
Number of Hedge Fund Shareholders: 40
Boyd Gaming Corporation (NYSE:BYD) is another small-cap gambling-related stock that hedge funds love. Ownership of BYD has skyrocketed by 74% since the first quarter of 2021, with Lee Ainslie’s Maverick Capital and Robert Hockett’s Covalent Capital Partners being among the company’s new shareholders.
Boyd Gaming Corporation (NYSE:BYD)’s Q2 revenue was flat year-over-year at $894 million, which beat estimates, being up against challenging comps from a year ago, when government stimulus checks provided a sales boost. Boyd’s margins improved to 39.6% during the quarter, the fifth straight quarter of 39% margins for the gaming company. The company’s strong Q2 trends appear to have persisted into July according to Barclays analyst Brandt Montour, who has an ‘Overweight’ rating and $65 price target on the stock.
The Baron Real Estate Fund likes Boyd Gaming Corporation (NYSE:BYD)’s attractive valuation and potential as a takeover target, having this to say about the company in its Q1 2022 investor letter:
“Following strong share price performance in 2021, the shares of Boyd Gaming Corporation continued to perform well in the first quarter of 2022. Boyd is one of the largest and most successful casino entertainment companies in the U.S. The company owns and operates 28 casino gaming properties in 10 states with a large presence in Las Vegas and a geographic focus on the drive-to, leisure gaming customer. We remain optimistic about the prospects for Boyd’s shares because business conditions are strong, management maintains a liquid and conservatively capitalized balance sheet, insiders own approximately 27% of the company, the shares remain attractively valued at only 7.5 times 2022 estimated cash flow and a double-digit free cash flow yield, and we believe the company could be an attractive acquisition candidate should its current valuation remain discounted relative to recent private market casino and gaming transactions.”
2. Madison Square Garden Sports Corp. (NYSE:MSGS)
Number of Hedge Fund Shareholders: 40
Hedge fund ownership of Madison Square Garden Sports Corp. (NYSE:MSGS) has gradually trended down over the past three years after peaking at 59 in the first quarter of 2019. It nonetheless ranks second on this list, with John Rogers’ Ariel Investments and Mason Hawkins’ Southeastern Asset Management ranking as some of its most bullish shareholders.
Madison Square Garden Sports Corp. (NYSE:MSGS)’s fiscal Q3 revenue topped estimates at $337.8 million, but earnings widely missed estimates for the second straight quarter, coming in at $1.00. Wolfe Research analyst Peter Supino expects intense competition for customers will drive up acquisition costs and put further pressure on MSGS’s bottom line. He has an ‘Outperform’ rating and $231 price target on the stock.
The aforementioned Ariel Investments published its Ariel Fund & Ariel Appreciation Fund Q3 2021 investor letter last year, in which it had this to say about what makes Madison Square Garden Sports Corp. (NYSE:MSGS) such an attractive proposition:
“In Ariel Fund and Ariel Appreciation Fund, we re-initiated a position in Madison Square Garden Sports Corp (MSGS). As the owner of two storied sports franchises in the biggest U.S. market—the New York Knicks (NBA) and Rangers (NHL)—we believe the company’s scarce and valuable content should continue to grow and command a premium as the economic reopening continues.”
1. Coupa Software Incorporated (NASDAQ:COUP)
Number of Hedge Fund Shareholders: 46
Hedge fund ownership of Coupa Software Incorporated (NASDAQ:COUP) fell by 22% in the first quarter, which wasn’t enough to stop the company from topping our list of small-cap growth stocks that hedge funds love. Stanley Druckenmiller and Steve Cohen were among the prominent hedge fund managers to unload COUP from their portfolios during Q1.
Coupa Software Incorporated (NASDAQ:COUP)’s cloud-based business spend management platform utilizes AI to analyze and help inform company’s invoicing, supply chain, and other decisions. Demand for the company’s software continues to be robust given the ongoing supply chain challenges facing many companies.
The Aristotle Large Cap Growth Fund explained why it, and possibly other hedge funds, decided to sell off Coupa Software Incorporated (NASDAQ:COUP) during Q1, having this to say about the company in its Q1 2022 investor letter:
“We sold our position in Coupa Software following the company’s fourth quarter 2021 earnings results. The company reported earnings that were disappointing relative to the growth trajectory of both pre-COVID and prior quarters over the past fiscal year. We are concerned that the company is seeing slowing traction in the enterprise sector and felt that the weak topline and billings guidance along with margin compression from increased sales and marketing costs creates too many headwinds for us to be comfortable with. The weak fiscal year 2023 billings guidance when combined with management’s qualitative comments about a strong pipeline is concerning to us, and we believe management has done a disappointing job in providing more transparency around the growth drivers for the business.”
For more of the latest stock picks worth considering for your portfolio, check out 10 Best Cyclical Stocks for Inflation and Top 10 Stock Picks of Teresa Barger’s Cartica Management.
Disclosure: None.
