We recently compiled a list of the 10 Most Promising Growth Stocks According to Hedge Funds. In this article, we are going to take a look at where Amazon.com Inc (NASDAQ:AMZN) stands against the other Most Promising Growth Stock According to Hedge Funds.
Bull Market and Investor Sentiment
Investors had been anxiously anticipating the start of a bull market, which the S&P 500 confirmed earlier this year. The bull run has seen the market continue to rise to new record highs, supporting revenue and earnings growth across the board.
Fast forward, the upward momentum appears to have peaked, with market indices at record highs. While it was highly expected that stocks would explode on the Federal Reserve offering support to a struggling economy with interest rate cuts, that has not been the case.
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It’s become increasingly clear that investors have become more sensitive to growth scares as the global economy faces many issues. Top on the list is the rising geopolitical tensions in the Middle East that threaten to disrupt supply chain networks. Energy prices rising owing to the escalation of a full-blown war could trigger higher inflation, something that is unsettling the markets.
Analysts at UBS are already warning investors that they should get overweight on defensive names as global growth slows at the back of deteriorating fundamentals. While UBS doesn’t anticipate a severe downturn, the bank is cautious, advising its clients to focus on important sectors like utilities and pharmaceuticals, which always outperform in a downturn.
While investors are increasingly rotating into defensive plays amid concerns about geopolitical tensions and the slowing global economy, Morgan Stanley Investment Management’s Andrew Slimmon recommends against this strategy.
“Now is the time to just be cautious. Don’t chase the defensives that are working because I think when we get to the fourth quarter, that won’t work,” the portfolio manager told CNBC’s “The Exchange.
“While our expectation is for October to remain choppy, we don’t view the overall market action to be bearish and encourage investors to maintain perspective on the longer-term trends,” Robert Sluymer, technical strategist at RBC Wealth Management, wrote to clients.
The sentiments echo the need to focus on high-growth companies. Investors who diversify their portfolio into high-growth companies eventually earn great returns regardless of how much a stock rises or falls in the short term.
Analysts project that S&P 500 stocks will grow at a median annual EPS rate of 8.5% over the next five years. On the other hand, the best growth stocks are well poised to outperform this benchmark by a factor of two to three or more.
For starters, companies exposed to artificial intelligence spectacles or those leveraging technology continue to deliver record earnings and revenue growth, thus dominating most hedge fund portfolios. Additionally, the most promising growth stocks, according to hedge funds, are those whose core business would be positively impacted by improving consumer purchasing power. As the Fed steers the economy into a soft landing, consumer purchasing is expected to improve, benefiting consumer cyclical stocks. Moreover, the rate cuts will likely benefit growth and tech stocks as well.
Market fluctuations are inevitable, but the secret to a growth stock’s success lies in the robustness of its core operations. Regardless of whether a stock is rising or falling in the short term, if you consistently invest in a competitively solid business, you’ll eventually reap substantial rewards.
Pixabay/ Public Domain
Our Methodology
To compile the list of the most promising growth stocks according to hedge funds, we sifted through ETFs and online rankings to find 30 popular growth stocks. Then we selected the 10 that were the most widely held by hedge funds, as of Q2 2024. Finally, we ranked the stocks in ascending order of the number of hedge funds that have stakes in them.
At Insider Monkey, we are obsessed with 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).
Amazon.com Inc (NASDAQ:AMZN)
Number of Hedge Fund Holders: 308
Amazon.com, Inc. (NASDAQ:AMZN) has often been perceived as a technology investment play, given its investment in various tech solutions to strengthen its edge in multiple sectors. Nevertheless, it stands out as one of the most promising growth stocks according to hedge funds for diversifying an investment portfolio in the consumer cyclical sector.
With the recent interest rate cuts expected to bolster consumer purchasing power, Amazon should be one of the biggest beneficiaries as customers flocking its e-commerce platform.
Amazon.com, Inc. (NASDAQ:AMZN)’s long-term prospects lie in the digital marketplace as the Prime program gains widespread recognition. The more benefits Amazon offers through Prime, the more loyal its customers become, allowing it to increase its pricing and thus generate more revenue.
Likewise, the company emerged successful in the online shopping sector by integrating the retail business framework and leveraging its vast scale to provide outstanding service and competitive pricing. This strategy is being replicated in the cloud industry, where it commands a 31% market share.
While the company generates most of its revenue from the online marketplace, it reaps most profits from its cloud unit, which is billed as the world’s largest cloud infrastructure. AWS operates at much higher margins, thus subsidizing the growth of Amazon’s lower-margin e-commerce business.
Amazon.com, Inc. (NASDAQ:AMZN) has also sought to diversify its revenue stream by advertising live sports and acquiring the rights to air National Basketball Association and Women’s National Basketball Association games beginning in 2025.
Analysts expect Amazon’s earnings to grow by nearly 28% yearly over the next three to five years, justifying the stock trading at a premium with a price-to-earnings multiple of 30. Additionally, analysts rate the stock as a buy with an average price target of $223.43, implying a 21.77% upside potential. Based on our Insider Monkey database, by the end of Q2 2024, 308 hedge funds had invested in AMZN, with their total stakes reaching $65.85 billion.
Diamond Hill Select Strategy stated the following regarding Amazon.com, Inc. (NASDAQ:AMZN) in its Q2 2024 investor letter:
“Among our top individual contributors in Q2 were Amazon.com, Inc. (NASDAQ:AMZN), Texas Instruments and Mr. Cooper Group. Internet retail and cloud infrastructure company Amazon is benefiting from strong profitability, particularly in its Amazon Web Services (AWS) business. Shares also received a boost amid growing optimism around the demand for AWS as Amazon customers’ investments in generative AI projects continue growing.”
Overall AMZN ranks 1st on our list of 10 Most Promising Growth Stocks According to Hedge Funds. While we acknowledge the potential of AMZN as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AMZN, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
