We recently compiled a list of the 12 Best Up and Coming Stocks To Buy According to Hedge Funds and in this article, we discuss whether PDD Holdings Inc. (NASDAQ:PDD) is the best up-and-coming stock to buy now.
Despite the concerns surrounding the market over the last few years, the broader market has performed exceptionally well as the S&P 500 reached new record highs crossing 5,300 points in mid-May. While the broader market has been surrounded by bearish sentiment since 2022 and even after its tremendous performance in 2023, many analysts have retracted their statements and are now expecting a positive future. For the year-end 2024, UBS and BMO expect the index to reach 5,600, Wells Fargo predicts that it will close out the year at 5,535 and even one of the most bearish analysts, Morgan Stanley’s Mike Wilson, raised the target to 5,400 from the prior 4,500.
Interest Rate Predictions
Interest rate hikes and cuts have been a major part of discussion in the markets for the last couple of years. In 2023, many analysts predicted up to six cuts in 2024 but the predictions faded over time with hotter-than-expected inflation data. At the Federal Reserve’s May 1 meeting, Chairman Jerome Powell showed hesitation in providing a specific time for any decision on rate cuts and said that the Fed needs more data before taking any step. However, the chairman did hint that the chances of hikes are highly unlikely. Some experts also believe that there may not be a rate cut this year as discussed in our previous article about best soaps and cleaning materials stocks regarding Ed Yardeni of Yardeni Research’s comments.
According to CME’s FedWatch tool, 98.9% of the market is expecting interest rates to remain the same at the Fed’s June meeting while 1.1% believe that the Fed may raise the rates by 25 basis points (bps). Morgan Stanley predicts rate cuts to start in September at 25 basis points as they expect that inflation will begin to decline which could give the Fed enough confidence to start cutting rates. The FedWatch tool reveals that in September, 51.6% of the market isn’t expecting any rate cuts, 42.8% expects a 25 bps reduction, 5% expect rates to be cut by 50 bps and 0.6% believe that the rates will be 25 bps higher than the current levels of 5.25% to 5.5%.
Market Upside Potential Amidst Tightening Policies
Recently, we have seen another pullback in the market as the broader market has contracted by 1.5% between May 27 to 30. However, some experts still expect an upside and believe that the market is in healthy condition.
On May 29, former chief investment strategist for The Leuthold Group and Wells Capital Management, Jim Paulsen told CNBC that he is optimistic about the economy and highlighted its resilience despite previous recession predictions and challenges like inverted yield curves. He noted the strength of corporate balance sheets, overall economic health, liquidity, and positive recent earnings reports. He also acknowledged that tightening policies such as higher yields, a stronger dollar, a lower fiscal deficit to GDP ratio, modest monetary growth, and balance sheet contraction will eventually slow the economy and reduce inflation. Paulsen predicts that inflation will fall below 3%, creating favorable conditions for the market and suggesting potential for further upside. Moreover, Paulsen noted that the inflation has indeed come down if we compare it to 2022’s 9% and added that he does not think that the Fed target of 2% inflation is needed for “things to be good.”
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Our Methodology
For this article, we used the Yahoo Finance stock screener to identify over 400 stocks that have experienced revenue growth of at least 40% year-over-year and a market cap of above $300 million. We then narrowed down our list to 12 stocks that have seen growth in hedge fund sentiment between the fourth quarter of 2023 and the first quarter of 2024, have positive analyst sentiment, and have consistent revenue growth. We listed the best up and coming stocks in ascending order of their hedge fund sentiment.
The hedge fund data was taken from Insider Monkey’s database of 919 elite hedge funds as of the first quarter of 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 best hedge funds. Our quarterly newsletter’s strategy picks 14 small and large-caps every quarter and it has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Is PDD Holdings Inc. (NASDAQ:PDD) the Best Up-and-Coming Stock to Buy Now?
PDD Holdings Inc. (NASDAQ:PDD)
Year-over-Year Revenue Growth in FQ3 2023: 94%
Year-over-Year Revenue Growth in FQ4 2023: 123%
Year-over-Year Revenue Growth in FQ1 2024: 131%
Number of Hedge Fund Holders: 76
PDD Holdings Inc. (NASDAQ:PDD), previously known as Pinduoduo Inc., is an owner and operator of various businesses, including an e-commerce platform known as Pinduoduo and an online marketplace called Temu.
On May 22, PDD Holdings Inc. (NASDAQ:PDD) announced first-quarter earnings. The non-GAAP EPS was $2.83, which beat the estimates by $1.40. The revenue grew by 131% year-over-year to $12.02 billion and topped the estimates by $1.44 billion.
On its earnings day, PDD Holdings Inc. (NASDAQ:PDD) reported substantial net cash generated from operating activities, amounting to RMB 21.1 billion in the first quarter of 2024, compared to RMB 1.3 billion in the same period last year. As of March 31, it holds RMB 242.1 billion in cash, cash equivalents, and short-term investments, providing ample liquidity to support future growth initiatives, R&D investments, and strategic acquisitions.
Wall Street analysts are quite bullish on PDD Holdings Inc. (NASDAQ:PDD) as all 14 analysts that have covered the stock in the last three months maintain a buy-equivalent rating on it. The stock’s average price target of $217.75 represents a 42.2% upside to its share price, as of May 30. Over the last twelve months, PDD Holdings Inc.’s (NASDAQ:PDD) stock has gained nearly 120% yet has a relatively cheap valuation as it is trading at a trailing twelve-month PE ratio of 19.8 as of May 30 as compared to the internet retail industry’s average of 37.74x.
In Q1, hedge fund sentiment was positive toward PDD Holdings Inc. (NASDAQ:PDD) as 76 funds had stakes in the stock, compared to 71 funds in the prior quarter. Hillhouse Capital Management is the biggest shareholder in the company with a position worth $1.37 billion, as of March 31.
Baron Emerging Markets Fund stated the following regarding PDD Holdings Inc. (NASDAQ:PDD) in its fourth quarter 2023 investor letter:
“We added to our digitization theme by building a position in PDD Holdings Inc. (NASDAQ:PDD), a leading Chinese e-commerce platform. Founded in 2015, the company has emerged as China’s second largest e-commerce player, capturing approximately 20% market share. In our view, PDD’s competitive moat lies in its team purchase model that facilitates bulk buying through direct partnerships with manufacturers, thereby eliminating intermediaries (e.g., distributors and middlemen) and lowering costs. Key factors driving the company’s meteoric growth include rising consumer demand for affordable products in China amid an economic slowdown, small-scale merchants seeking alternatives to Alibaba, and superior management execution. PDD’s revenue growth outpaces gross merchandize value growth owing to rising take rates as merchants aggressively compete for consumer traffic on the platform. In our view, PDD should continue to gain market share given its dominance in the value-for-money segment, growing affordable branded product offerings, and high operational efficiency. We believe the company’s growth will be further supported by the recent launch of its international e-commerce platform, Temu, which has become one of the fastest growing apps globally. Leveraging China’s excess manufacturing capacity, Temu has strong negotiating power with domestic suppliers and attracts global consumers with competitively priced products. Temu’s recent initiatives to improve unit economics, coupled with achieving variable breakeven in the sizable U.S. market, showcase management’s skill and commitment to sustained growth. We expect PDD to at least double its earnings and free cash flow in the next three years, with the potential for continued compounding thereafter.”
PDD Holdings Inc. (NASDAQ:PDD) takes the top spot on our list of best up-and-coming stocks to buy. To find other up-and-coming stocks that hedge funds and analysts like, check out our free report on the 12 Best Up and Coming Stocks To Buy According to Hedge Funds.
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Disclosure. None. This article is originally published on Insider Monkey.