In this piece, we will take a look at Ken Fisher’s top 10 growth stock picks with 30%+ revenue growth.
Growth is the holy grail of investing. After all, equities attract investors because they are return driven securities, and securities that deliver growth often produce the strongest returns. Growth, in stock valuation, comes in several flavors. The most commonly analyzed metric is share price growth, which evaluates the percentage change in the share price over a time period.
Other growth valuations come through earnings growth or revenue growth. Among these, earnings is the more commonly evaluated metric as it determines the profitability of a company. These profits are key for growth stocks since the post net income ‘money’ on a firm’s income statement is either paid out in the form of dividends or reinvested in growth if it isn’t accounted for as retained earnings. The market generally prices stocks that are expected to aggressively grow in the future high compared to their earnings in the form of the P/E ratio.
The other ratio for evaluating growth stocks is the price to sales or P/S ratio. And this is where Ken Fisher enters the conversation. Fisher is one of the richest people in the world, with estimates from Forbes Magazine showing that his net worth stood at $11.2 billion as of July 2024. At the heart of Fisher’s riches is his investment fund Fisher Investments. The total value of the fund’s 13F holdings as reflected by its SEC filings for the first quarter of 2024 is $214 billion according to Insider Monkey’s research. This makes Fisher Investments one of the biggest financial firms in the world, and its investment approach as evidenced by some of the biggest stakes in the filings is characterized by investing in high growth technology companies.
Fisher started his firm in 1979 and focused on gaining an early foothold on market participants by sifting out information that was not widely available to investors. On the quantitative front, the P/S ratio was also quite critical to his approach and we’ll get to that in a bit. Over the next two decades, his firm would focus on investing in pure play US equities, global equities, and exUS or foreign equities. The firm would focus its investment products towards high net worth individuals in the 1990s, and from 2000 onwards, it would expand its presence in the UK, Canada, and Germany. Fisher Investments now has 15 offices in 16 countries and more than a hundred thousand clients worldwide as of July 2024.
Shifting gears to focus on the firm’s performance, data from the London Stock Exchange Group (LSEG) shows that data for 76 funds managed by Fisher Investments is available. Within these, the fund that invests for retirement plans has gained 19.18% year to date and 18.77% over the past year. Compared to the benchmark S&P index, the year to date performance is two percentage points higher while the 12 month performance lags the index by three percentage points. Another fund that targets US equities irrespective of capitalization is up by 24% over the past twelve months to lead the benchmark by three percentage points. In daily trailing total returns, this fund has delivered 14.39% over the past six months to lead benchmark US large cap equity returns of 11.36% by three percentage points.
Safe to say, Fisher’s strategies and secret sauce seem to be working. This then leads us to ask, what might they be? Well, in the 70s when Fisher was starting Fisher Investments, he started to focus on evaluating a firm’s market valuation relative to its revenue through the P/S ratio. This culminated in his seminal article in the American Association of Individual Investors. (AAII) in 1984. This paper highlighted Fisher’s conviction of a solid approach to sift out growth stocks, and his research showed that stocks with low price to sales ratios tended to do rather well as they were unpopular and any good news “translates directly into higher stock prices.” He compared the stocks with the lowest 25% price to sales and price to earnings ratio to demonstrate that the seven and nine stocks with the lowest price to sales ratios delivered 64.57% and 56.11% in respective returns while the nine lowest P/E stocks delivered 28.67% in returns. During the same time, the Dow posted a gain of 20.3%.
Since multiples that use growth rates are typically used to value growth stocks, particularly those that are unprofitable, they are quite sensitive to macroeconomic conditions and particularly inflation and high interest rates. Another popular revenue based growth stock valuation metric is the Enterprise Value/Revenue ratio and it is popular for valuing software as a service (SaaS) stocks. After the coronavirus pandemic hit, the Fed rapidly cut interest rates to stimulate the economy and this translated well for EV/Revenue. Before the rate cuts, the median EV/Revenue for publicly traded SaaS stocks was 11 and after the cuts, it soared and nearly doubled to sit at 20 in 2021.
Similarly, the interest rate hikes of 2022 and high inflation that led to tight business budgets didn’t fare well for EV/Revenue. Since high interest rates also make it difficult for firms to finance their business operations, and high inflation leads to rising costs, SaaS firms face twice the impact in the form of lower revenue. This is also translated into their EV/Revenue multiples, as for the last 18 months, the median multiple was 7 which is at a multi year low. The lower multiples are accompanied by dropping growth rates, as while the pre pandemic median revenue growth rate of SaaS companies was 30% and accelerated to 33% during the pandemic, it has since dropped and is hovering around 17%.
So, as growth slows down and multiples struggle, it might be wise to see what the guru of growth Ken Fisher is doing. We’ve done so today so read more below.
Our Methodology
To make our list of Ken Fisher’s top revenue growth stocks, we scanned Fisher Investments’ Q1 2024 SEC filings and ranked the top 160 holdings by their three year annualized revenue growth. Out of these, the top ten Ken Fisher stocks with the highest revenue growth were chosen.
We also mentioned the number of hedge funds that had bought these stocks during the same filing period. 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).
10. Trip.com Group Limited (NASDAQ:TCOM)
Number of Hedge Fund Investors in Q1 2024: 49
3 Yr Revenue Growth: 34.44%
Fisher Investments’ Q1 2024 Stake: $134 million
Trip.com Group Limited (NASDAQ:TCOM) is a Singapore based travel services provider that enables users to plan and manage their trips. The firm’s revenue has grown sizeable over the past couple of years as it recovers from the impact of the coronavirus pandemic. Trip.com Group Limited (NASDAQ:TCOM)’s first quarter revenue grew by 24% annually to sit at CNY11.9 billion, and its earnings grew by 27.8% to sit at CNY6.62. Trip.com Group Limited (NASDAQ:TCOM)’s primary market is China, and the firm has been streamlining its business model as of late to offer a one stop shop for travel experiences. On this front, it announced a partnership with Proticket earlier this year to allow it to gain access to a wide array of travel industry firms. Additionally, Trip.com Group Limited (NASDAQ:TCOM) is also seeking to further penetrate the Chinese market by targeting second and third tier cities for a wide consumer base. This expansion comes at a time when these cities are seeing improved infrastructure such as hotels and roads.
Since it’s a software focused business, Trip.com Group Limited (NASDAQ:TCOM) has to keep a careful eye on margins to ensure cost control. Any weakness on this front can translate into the share price, and here’s what management had to say for margins during its Q1 2024 earnings call:
“Yes, we have achieved a healthy margin level for our domestic business, thanks to the large scale and scalability that we achieved. And the outbound business normally have a slightly higher margin, thanks to the average higher selling price. And at the same time, related to the cost, including the service cost, the product development cost, as well as sales and marketing costs are quite similar to the — compared with the domestic business. So therefore, outbound travel normally is the higher-margin business for us. With regard to the Trip.com business, as I said before, we closely — although the Trip.com business has [indiscernible] in the investment period, however, we closely monitor the contribution margin of the Trip.com business.
And recently, our Trip.com business as a whole has achieved at least a breakeven level in terms of the contribution margin. And in the longer-term period, we strongly believe that the Trip.com business will also become a profitable, healthy growth business in the future. So in summary, we expect our margins to align with — will be aligned with the typical seasonal patterns, reflecting the strong business growth and disciplined cost management. And looking ahead, our margin expansion will primarily stem from operational scalability and approve the sales and marketing efficiencies. However, this may be partly offset by additional expenses associated with expanding our international operations.”
9. Expedia Group, Inc. (NASDAQ:EXPE)
Number of Hedge Fund Investors in Q1 2024: 62
3 Yr Revenue Growth: 35.17%
Fisher Investments’ Q1 2024 Stake: $204 million
Expedia Group, Inc. (NASDAQ:EXPE) is a US based travel services provider. It has settled into 2024 after having undergone a significant transformation since the pandemic. This has seen Expedia Group, Inc. (NASDAQ:EXPE) consolidate its hotel and rental vacation brands under the Expedia roof, bring a stunning seven loyalty programs under the One Key banner, eliminate dependency on 76 different marketing firms which often saw Expedia Group, Inc. (NASDAQ:EXPE)’s different businesses compete with each other, and eliminate several of its brands as well as 12% of its workforce. Put together, these changes should put Expedia Group, Inc. (NASDAQ:EXPE) on track to capture the growth in global online travel, particularly since it is only one of two players in the global market. However, one key area in which Expedia Group, Inc. (NASDAQ:EXPE) lags and which has worried investors is its margin. The firm’s trailing twelve month operating margin is 11.5%, which is a whopping 16 percentage points lower than its closest rival Booking.com’s 27.7%. This difference is also apparent in its valuation, with Expedia Group, Inc. (NASDAQ:EXPE)’s forward P/E ratio of 11.4 nearly half that of Booking’s 22.2. However, it also provides the shares with some room to grow if the firm’s turnaround plan bears fruit.
Expedia Group, Inc. (NASDAQ:EXPE)’s management commented on costs during its Q1 2024 earnings call where it shared:
“To that end, in February, we announced cost actions that will impact approximately 1,500 employees through this year. We expect that these actions will unlock substantial savings on an annualized basis across capitalized labor, cost of sales and overhead costs. And as a result of all of these factors, we delivered strong first quarter EBITDA of $255 million, which was up 38% year-over-year, with an EBITDA margin of 8.8%, expanding over 190 basis points year-over-year. This was higher than expected given the higher revenue we delivered and the leverage to the P&L that provides, along with lower cost of sales, both of which more than offset our marketing investments to drive future growth. It is also important to note that EBITDA also benefited from a decision we made to invest more in pricing actions as opposed to additional direct marketing.”
