In this article, we discuss the 10 growth stock picks by hedge funds.
Consumer spending patterns are starting to shift from goods to services as the economy normalizes after the disruptions of the COVID-19 pandemic. According to the results of a survey by the Institute for Supply Management, an Arizona-based non-profit body, the measure of new orders in the services industry stood at 63.5 in September, up from 63.2 in August. The non-manufacturing activity index was also up to 61.9 in September from 61.7 in August, indicating the growth of the services sector.
The indicators are surprising since inflation fears have dogged the progress of an economic recovery even after mass vaccination campaigns across the globe. Despite the issues related to labor, logistics, and materials that are pushing the prices of goods sky-high, the growth of the services sector – responsible for more than two-thirds of US economic activity – is perhaps one reason why the government has dismissed inflation concerns as transitory. These concerns are expected to last well into 2022, according to Oren Klachkin, a New York-based economic expert.
In this environment, growth stocks are expected to perform well since the consumer spending patterns are shifting and the economy is normalizing. Investors keen to take advantage of this should check out the top stock picks of hedge funds at the end of the second quarter 2021 which include Expedia Group, Inc. (NASDAQ:EXPE), NVIDIA Corporation (NASDAQ:NVDA), and Activision Blizzard, Inc. (NASDAQ:ATVI), among others discussed in detail below. Growth stocks often fall in the space, biotech, and other explosive domains.
Why should we care about hedge fund activity? Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 86 percentage points since March 2017. Between March 2017 and July 2021 our monthly newsletter’s stock picks returned 186.1%, vs. 100.1% for the SPY. Our stock picks outperformed the market by more than 86 percentage points (see the details here). That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Our Methodology
With this context in mind, here is our list of the 10 growth stock picks by hedge funds. The firms were selected using data from the 873 hedge funds tracked by Insider Monkey.
Only those that saw an increase in the number of hedge funds having stakes in the firm in the second quarter, as compared to the first quarter of 2021, were picked. The list is compiled according to the number of hedge funds having stakes in each stock.
Special importance was assigned to the basic business fundamentals and analyst ratings for each firm to provide readers with some context so they can make more informed investment choices.
Growth Stock Portfolio: Stock Picks By Hedge Funds
10. Biogen Inc. (NASDAQ:BIIB)
Number of Hedge Fund Holders in Q2: 67
Number of Hedge Fund Holders in Q1: 63
Biogen Inc. (NASDAQ:BIIB) is placed tenth on our list of 10 growth stock picks by hedge funds. The company develops therapies for the treatment of neurological and neurodegenerative diseases. It operates from Massachusetts.
On September 22, investment advisory Needham initiated coverage of Biogen Inc. stock with a Buy rating and a price target of $400, noting the potential of pipeline drugs of the firm was “underappreciated”.
At the end of the second quarter of 2021, 67 hedge funds in the database of Insider Monkey held stakes worth $3.1 billion in Biogen Inc., up from 63 in the preceding quarter worth $1.4 billion.
Just like Expedia Group, Inc., NVIDIA Corporation, and Activision Blizzard, Inc., Biogen Inc. is one of the growth stocks on the radar of hedge funds.
In its Q2 2021 investor letter, Longleaf Partners Fund highlighted a few stocks and Biogen Inc. (NASDAQ:BIIB) was one of them. Here is what the fund said:
“Biogen (52%, 1.24%), a biotechnology company specializing in therapies for the treatment of neurological diseases, contributed in a way that warrants a longer than usual writeup. When we first began buying the company in early January, the stock scored well on all three Business, People and Price criteria, but the range of outcomes was wider than most investments for us. On the business, while the company has had a leading position in neuroscience for decades, it had become a collection of assets that was hard for the stock market to value. This led to most short-term investors focusing on year-over-year (YOY) earnings declines in 2021 and pipeline uncertainty. We focused most on strong cash flows from Biogen’s Multiple Sclerosis franchise, a growing yet hidden biosimilars business, and a pipeline that we believed was actually quite interesting and diversified beyond the manic market focus on Aducanumab, a proposed treatment for Alzheimer’s. On the people front, we also liked what the board and management had been doing (large, discounted repurchases and prudent internal and external investments) and not doing (no big, dumb M&A or unsustainable dividends). Our single point appraisal was around $375/share, but we saw a range at the low end of slightly above $250 if the pipeline totally failed or approaching $500 if the company saw a reasonable amount of pipeline success. We also thought that we were effectively paying a very low double-digit multiple of FCF/share. It is important to note that we were not betting on our science expertise or any other predictions that fall outside our circle of competence. Rather, we used our bottom-up appraisal skills to find a security that was mispriced at that given moment – we had followed the company for over 10 years before our purchase – and that shorter-term investors were afraid to own due to the potential for near-term stock price volatility. We started with a partial position, as we felt the wider-than-usual range of outcomes and uncertainty around the stock could lead to the chance to fill it out at a better price later.
On June 7, the FDA approved Aducanumab (now known as Aduhelm) after a contentious process that has yet to fully play out. The stock shot upward, and our single point value increased to $425. With the stock trading at that level, we exercised our price discipline and sold our position. In this era of “multi-decade-compounders at any price” and given SAM’s history of being long term, it feels weird to be in and out of something so quickly. But it also feels OK to be able to use our appraisal skills to secure a payoff for our long-term clients. The company’s stock price has fallen since our sale, and we will continue to watch the price-to-value (P/V) gap going forward.”
9. Palo Alto Networks, Inc. (NYSE:PANW)
Number of Hedge Fund Holders in Q2: 69
Number of Hedge Fund Holders in Q1: 64
Palo Alto Networks, Inc. (NYSE:PANW) is ranked ninth on our list of 10 growth stock picks by hedge funds. The firm provides cybersecurity solutions and is headquartered in California.
On September 15, investment advisory Deutsche Bank maintained a Buy rating on Palo Alto Networks, Inc. stock and raised the price target to $560 from $515, underlining that the momentum was “indicative of a clear product fit in a buoyant cybersecurity end market”.
Out of the hedge funds being tracked by Insider Monkey, Connecticut-based firm Viking Global is a leading shareholder in Palo Alto Networks, Inc. with 2.6 million shares worth more than $979 million.
8. Workday, Inc. (NASDAQ:WDAY)
Number of Hedge Fund Holders in Q2: 72
Number of Hedge Fund Holders in Q1: 69
Workday, Inc. (NASDAQ:WDAY) is a California-based firm that provides enterprise cloud applications. It is placed eighth on our list of 10 growth stock picks by hedge funds.
On September 22, investment advisory Needham reiterated a Buy rating on Workday, Inc. stock and raised the price target to $310 from $290, noting the firm could reaccelerate growth exiting the pandemic.
At the end of the second quarter of 2021, 72 hedge funds in the database of Insider Monkey held stakes worth $5.18 billion in Workday, Inc., up from 69 in the previous quarter worth $5.17 billion.
In addition to Expedia Group, Inc., NVIDIA Corporation, and Activision Blizzard, Inc., Workday, Inc. is one of the growth stocks attracting the attention of institutional investors.
In its Q1 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Workday, Inc. (NASDAQ:WDAY) was one of them. Here is what the fund said:
“In addition to the new issue market, we have been tactically adding growth exposure. We took advantage of the selloff in disruptors that comprise a large portion of the portfolio to initiate a position in enterprise software maker Workday.”
7. MercadoLibre, Inc. (NASDAQ:MELI)
Number of Hedge Fund Holders in Q2: 74
Number of Hedge Fund Holders in Q1: 69
MercadoLibre, Inc. (NASDAQ:MELI) is placed seventh on our list of 10 growth stock picks by hedge funds. The firm operates an online commerce platform and is headquartered in Argentina.
On August 5, investment advisory BTIG maintained a Buy rating on MercadoLibre, Inc. stock and raised the price target to $1,930 from $1,720, noting that the firm had delivered “robust” earnings in the second quarter.
At the end of the second quarter of 2021, 74 hedge funds in the database of Insider Monkey held stakes worth $4 billion in MercadoLibre, Inc., up from 69 in the previous quarter worth $5 billion.
Expedia Group, Inc., NVIDIA Corporation, and Activision Blizzard, Inc. are some of the top growth stocks right now, in addition to MercadoLibre, Inc..
Baron Funds, in its Q1 2021 investor letter, mentioned MercadoLibre, Inc. (NASDAQ:MELI). Here is what the fund has to say in its letter:
“MercadoLibre, Inc., a Latin American e-commerce and FinTech platform, declined in the quarter despite reporting very strong fourth quarter results. MercadoLibre falls into a category of businesses that were net beneficiaries of last year’s lockdowns and reduced consumer gatherings that fell out of favor this quarter as investors looked toward economic reopening and normalization. We are confident in MercadoLibre’s ability to create substantial long-term value as it grows into a regional powerhouse across e-commerce and financial services.”
6. JD.com, Inc. (NASDAQ:JD)
Number of Hedge Fund Holders in Q2: 76
Number of Hedge Fund Holders in Q1: 75
JD.com, Inc. (NASDAQ:JD) is ranked sixth on our list of 10 growth stock picks by hedge funds. The company owns and operates an ecommerce platform. It is headquartered in China.
On September 15, investment advisory Stifel reiterated a Buy rating on JD.com, Inc. stock and raised the price target to $100 from $90, underlining that the firm appeared “less exposed” to regulatory risk than peers in China.
Out of the hedge funds being tracked by Insider Monkey, New York-based investment firm Tiger Global Management LLC is a leading shareholder in JD.com, Inc. with 51.5 million shares worth more than $4.1 billion.
In its Q1 2021 investor letter, Arisaig Partners, an asset management firm, highlighted a few stocks and JD.com, Inc. (NASDAQ: JD) was one of them. Here is what the fund said:
“Our largest holding as a firm, JD.com, we expect to grow earnings at an annualised rate of 30% over the next five years, implying it will trade on an EV / EBITDA of 7.5x at the end of this period. Is this a growth stock or a value stock? Does anyone care? Do these labels really matter?
For the Asia Fund, with a higher pre-existing allocation to our core FMCG holdings coming into the year, we took advantage of capital market volatility to further concentrate on our highest conviction names. JD.com has been the main destination for our limited reallocations as evidence continues to emerge supporting our thesis that the company has a strong right-to-win in the large and highly fragmented USD1.8th Chinese grocery market. We have also been encouraged by the fact that after years of persistence, the company is beginning to engage with us on ESG issues (we have specifically discussed data protection, climate change and the circular economy). ESG is now being considered at the board level, and specific sustainability reporting should follow in the coming months. Having long displayed a healthy obsession with customer service, we interpret these latest conversations as a sign that JD is beginning to develop a more sophisticated understanding of its impact on all stakeholders.”
5. Activision Blizzard, Inc. (NASDAQ:ATVI)
Number of Hedge Fund Holders in Q2: 78
Number of Hedge Fund Holders in Q1: 76
Activision Blizzard, Inc. is a California-based firm that develops and publishes interactive entertainment content. It is placed fifth on our list of 10 growth stock picks by hedge funds.
On September 29, investment advisory Jefferies kept a Buy rating on Activision Blizzard, Inc. stock with a price target of $120. Andrew Uerkwitz, an analyst at the advisory, issued the ratings update.
At the end of the second quarter of 2021, 78 hedge funds in the database of Insider Monkey held stakes worth $3.5 billion in Activision Blizzard, Inc., up from 76 in the preceding quarter worth $3.7 billion.
In its Q1 2021 investor letter, Cooper Investors, an asset management firm, highlighted a few stocks and Activision Blizzard, Inc. (NASDAQ:ATVI) was one of them. Here is what the fund said:
“The portfolio established a position in video game publisher Activision Blizzard. As a watchlist company we have followed Activision for several years. As a reminder the role of the watchlist is to allow us to focus on a select group of companies where we seek to observe important signals around either value latency, industry trends or management behaviour that portend attractive investment propositions.
Technology can often play a disruptive role in content, however video games are a clear beneficiary of technology, both in terms of more immersive and realistic gaming experiences as well as the monetisation opportunities this creates.
In order to benefit from these trends, video game publishers must be owners of unique IP. Activision Blizzard fits this bill perfectly boasting a portfolio which includes franchises such as Call of Duty, World of Warcraft and Diablo just to name a few.
The business is run by CEO Bobby Kotick, who together with Chairman Brian Kelly purchased the foundation assets for the company for US$400k in the early 1990s. Today Activision has a market capitalisation of over US$70bn. Over the last few years Bobby and his management team have refocused resources onto their best IP, with the goal of capitalising on the aforementioned industry tailwinds.
We saw the benefits of this in 2020 with the release of Call of Duty Mobile and Free-to-Play versions (with in game micro transactions) complimenting the traditional core console game. Engagement increased materially and due to the very favourable economics of content publishing, Operating Income more than doubled for the Call of Duty Franchise. Even adjusting for the impact of lockdowns, this is a phenomenal outcome.
Activision has 3-4 key pieces of IP with which they plan to repeat this playbook over the next couple of years. If they can replicate the success of Call of Duty, even in part, we see material upside to the free cash flow power of the business. Further, revenue sources are broadening which will move the profile away from a traditional lumpy annual release cycle of the old video game model towards one of a more recurring nature. This will transition Activision from a publishing to a services business, likely attracting a higher multiple than the current mid-low 20x FCF which is broadly in line with the market. To summarise, we see significant value latency and a pathway to double digit returns over the medium term.”
4. AbbVie Inc. (NYSE:ABBV)
Number of Hedge Fund Holders in Q2: 82
Number of Hedge Fund Holders in Q1: 72
AbbVie Inc. (NYSE:ABBV) is an Illinois-based firm that makes and sells pharmaceutical products. It is ranked fourth on our list of 10 growth stock picks by hedge funds.
On September 8, investment advisory JPMorgan maintained an Overweight rating on AbbVie Inc. stock with a price target of $140, noting that a recent pullback in the share price of the firm was a buying opportunity for investors.
At the end of the second quarter of 2021, 82 hedge funds in the database of Insider Monkey held stakes worth $5.3 billion in AbbVie Inc., up from 72 in the preceding quarter worth $5.9 billion.
3. NVIDIA Corporation (NASDAQ:NVDA)
Number of Hedge Fund Holders in Q2: 86
Number of Hedge Fund Holders in Q1: 80
NVIDIA Corporation is placed third on our list of 10 growth stock picks by hedge funds. The firm operates as a visual computing firm specializing in semiconductors. It is headquartered in California.
On October 5, investment advisory KeyBanc maintained an Overweight rating on NVIDIA Corporation stock and raised the price target to $260 from $245. John Vinh, an analyst at the advisory, issued the ratings update.
At the end of the second quarter of 2021, 86 hedge funds in the database of Insider Monkey held stakes worth $9 billion in NVIDIA Corporation, up from 80 the preceding quarter worth $6 billion.
In its Q1 2021 investor letter, Vulcan Value Partners, an asset management firm, highlighted a few stocks and NVIDIA Corporation (NASDAQ:NVDA) was one of them. Here is what the fund said:
“NVIDIA Corp. is the dominant supplier of Graphics Processing Units (GPUs) worldwide. NVIDIA’s GPUs are at the intersection of a number of important computing trends including the movement to the Cloud, artificial intelligence, autonomous vehicles, edge computing, gaming, and more. We previously owned NVIDIA and sold it in the third quarter of 2020 as the price to value gap closed and our margin of safety was reduced. As with all our MVP companies, we continued to follow NVIDIA closely. Since that time, NVIDIA reported excellent results and its value has compounded rapidly. The technology selloff at the beginning of the year negatively affected the stock price while our estimate of NVIDIA’s value per share increased. This happy combination of events created a margin of safety and an opportunity to once again add NVIDIA to the portfolio.”
2. Expedia Group, Inc. (NASDAQ:EXPE)
Number of Hedge Fund Holders in Q2: 87
Number of Hedge Fund Holders in Q1: 86
Expedia Group, Inc. is ranked second on our list of 10 growth stock picks by hedge funds. The firm owns and operates an online travel platform. It is headquartered in Washington.
On September 13, investment advisory Goldman Sachs initiated coverage of Expedia Group, Inc. stock with a Buy rating and a price target of $185, noting that the internet sector had ample opportunity for secular revenue growth in the coming months.
At the end of the second quarter of 2021, 87 hedge funds in the database of Insider Monkey held stakes worth $5.9 billion in Expedia Group, Inc., up from 86 in the previous quarter worth $6.1 billion.
In its Q1 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Expedia Group, Inc. (NASDAQ:EXPE) was one of them. Here is what the fund said:
“Several of our better performers in the first quarter were purchased while their business models were under stress from COVID restrictions or the macro environment the pandemic created. What gave us confidence in purchasing Expedia were the actions the company took to extend out their balance sheets until travel resumed. It should benefit as a broader vaccination rollout prompts cruise lines to resume operations and consumers to start traveling again and are positioned to deliver better margins and gain pricing power as the economy normalizes due to the cost controls implemented during the downturn.”
1. Thermo Fisher Scientific Inc. (NYSE:TMO)
Number of Hedge Fund Holders in Q2: 87
Number of Hedge Fund Holders in Q1: 79
Thermo Fisher Scientific Inc. (NYSE:TMO) is ranked first on our list of 10 growth stock picks by hedge funds. The company makes and sells life sciences tools. It is headquartered in Massachusetts.
On September 23, investment advisory Cowen maintained an Outperform rating on Thermo Fisher Scientific Inc. stock and raised the price target to $655 from $560, underlining the stock as one for a long-term investment.
At the end of the second quarter of 2021, 87 hedge funds in the database of Insider Monkey held stakes worth $7.3 billion in Thermo Fisher Scientific Inc., up from 79 in the preceding quarter worth $6.2 billion.
In its Q2 2021 investor letter, DEVON Equity Management, an asset management firm, highlighted a few stocks and Thermo Fisher Scientific Inc. (NYSE:TMO) was one of them. Here is what the fund said:
“The broad response to the COVID pandemic from the healthcare, pharmaceutical, and life science industries has been nothing short of incredible.
Whilst Vaccine makers understandably garner the highest profile, Thermo Fisher (6.2% of NAV) should be considered one of the outstanding performers, reflected in their ‘COVID related revenue’ hitting US$9.4bn in the 12 months since March 2020 (we appreciate measuring ‘contribution’ to the pandemic by ‘dollars’ generated is a little crude – but ultimately it does tell us something).
Ever the short-termist, Mr Market has looked to the inevitable slowdown in COVID related revenue uneasily – questioning whether it might mean a decline in Earnings come 2022. These concerns resulted in TMO shares declining 5% since their November 2020 peak, the worst performer of our Top 10 holdings.
Fortunately, we look at the COVID dynamic for Thermo in the diametrically opposite fashion.
We think Thermo’s response to COVID has bolstered their competitive positon in multiple verticals, and meaningfully enhanced the long term earnings potential of the company:
Firstly, Thermo came from ‘also-ran’ to leading player in diagnostic testing in 6 months. In ordinary times, this might be expected to take 5+ years. As demand for COVID testing inevitably declines, the capacity Thermo built during 2020 will be filled with demand from non-COVID diagnostic tests, a fast growing area before the pandemic with improved prospects in light of the role testing is playing in the COVID response.
Secondly, Thermo invested heavily…”[read the entire letter here]
You can also take a peek at 10 Stocks Reddit is Piling Into Before Earnings and 10 Best One Dollar Stocks to Buy Now.
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This article is originally published at Insider Monkey.
