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 NVIDIA Corporation (NASDAQ:NVDA) 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.
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).
NVIDIA Corporation (NASDAQ:NVDA)
Number of Hedge Fund Holders: 179
When it comes to artificial intelligence, NVIDIA Corporation (NASDAQ:NVDA) stays ahead of the pack owing to the strong demand for its graphic processing units used to power various AI models. The artificial intelligence frenzy has powered the company to become the most valuable company in the world on the back of record-breaking revenues and earnings.
Revenue in the second quarter was up 122% to $30 billion as net income more than doubled to $16.6 billion. The company expects Q3 revenue to increase 80% to $32.5 billion. Given the rate at which the company’s earnings and revenues are growing while the artificial intelligence frenzy is all but starting, underlines why it is one of the most promising growth stocks according to hedge funds.
While NVIDIA Corporation (NASDAQ:NVDA) has gained significantly over the past year, causing the stock to trade at a premium with a price-to-earnings multiple of 34, there is still room for more gains. The stock could hit another all-time high due to the ‘insane’ demand for the company’s new Blackwell chip.
CEO Jensen Huang said “It [Blackwell] gives us an opportunity to triple down, to really drive the innovation cycle so that we can increase capabilities, increase our throughput, decrease our costs, and decrease our energy consumption.”
Given that the company has delivered five straight quarters of triple-digit percentage revenue growth, the trend is not expected to change. The Federal Reserve cutting interest rates by 50 basis points and hinting at further cuts should make it easy for companies investing in AI, fueling additional demand for Nvidia chips.
The market experienced a strong tailwind for AI chips, and the expansion of data centers translates to NVIDIA Corporation (NASDAQ:NVDA)’s booming business. The company’s own guidance calls for 79% in revenue growth in the current quarter, affirming the tremendous opportunities in the market.
With NVIDIA Corporation (NASDAQ:NVDA)’s board approving an additional $50 billion in share buybacks last summer, there’s a strong belief that the stock is worth considering. It is one of the stocks rated as a buy with an average price target of $152.44, implying a 14.60% upside potential.
Based on our Insider Monkey database, by the end of Q2 2024, 179 investors held a positive outlook on NVDA, collectively holding stakes worth $53.7 billion.
Ithaka Group’s Ithaka US Growth Strategy stated the following regarding NVIDIA Corporation (NASDAQ:NVDA) in its Q2 2024 investor letter:
“NVIDIA Corporation (NASDAQ:NVDA) is the market leader in visual computing through the production of high-performance graphics processing units (GPUs). The company targets four large and growing markets: Gaming, Professional Visualization, Data Center, and Automotive. NVIDIA’s products have the potential to lead and disrupt some of the most exciting areas of computing, including: data center acceleration, artificial intelligence (AI), machine learning, and autonomous driving. The reason for the stock’s appreciation in the quarter was twofold: First, the stock benefited from tremendous excitement surrounding the further development of generative AI and the likelihood this would necessitate the purchase of a large number of Nvidia’s products far into the future; Second, Nvidia posted another strong beat[1]and-raise quarter, where the company upped its F2Q25 revenue guidance above Street estimates, showcasing its dominant position in the buildout of today’s accelerated computing infrastructure.”
Overall NVDA ranks 6th on our list of 10 Most Promising Growth Stocks According to Hedge Funds. While we acknowledge the potential of NVDA 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 NVDA, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
