In this piece, we will take a look at Ray Dalio’s top 10 growth stock picks with 30%+ revenue growth.
Valuing a stock comes in several shapes and flavors. The most common of these is the price to earnings ratio. Not only is this ratio used to evaluate the premium that investors are paying for a firm right now, but it is also used in tandem with forecast earnings to wager a guess at the future share price. This allows investors to position their portfolio with respect to the market and invest in those stocks that they believe can rise in the future.
However, a stock’s earnings aren’t the only income statement item used in stock valuation. Two other popular approaches are the price to sales or P/S ratio and its peer Enterprise Value to Revenue or EV/Revenue ratio. Both of these look at a firm’s top line performance, and the latter is typically used to value those firms that are in high growth sectors that are ripe for acquisitions.
Among these two ratios, the P/S ratio was popularized by the billionaire Ken Fisher. One of the richest people in the world, Fisher has a net worth of $11.2 billion. He shared his approach to using revenue growth in an article for the American Association of Individual Investors (AAII) in 1984. Fisher shared that the P/S ratio could help investors “ratios measure the popularity of the stock.” This, according to him, was key since it enabled them to sift out those stocks with low P/S ratios as these carried the highest chances of gaining value in the future in case of positive developments. Fisher added that while the P/E ratio was also a measure of popularity, it was too “elastic” and dependent on the various accounting assumptions used to arrive at net income.
A P/S ratio, on the other hand, removed the effects of these “accounting assumptions,” shared Fisher. To back his claims, he outlined that the stocks in the lower quartile (25%) of P/S ratios delivered 64.57% and 56.11% in returns for the bottom seven and nine stocks, respectively which far outstripped the 28.67% in returns of the nine lowest P/E stocks.
However, this piece is about Ray Dalio and not Ken Fisher. Like Fisher, Dalio is also one of the richest people in the world. As of July 2024, Forbes Magazine estimates his net worth to sit at $15.4 billion. Dalio’s hedge fund Bridgewater Associates‘ had listed $19.7 billion worth of investment positions through its SEC filings for 2024’s first quarter. These investments follow his approach of taking a broader look at the global economy and geopolitical environment and seeing which stocks can benefit.
Talking about returns, the past couple of years have been tough for Dalio’s firm. While he is neither Bridgewater’s CEO nor CIO right now, his philosophy is responsible for having set up most of Bridgewater’s most well known products like its Pure Alpha fund. Bridgewater’s Pure Alpha has struggled over the past four years. It has lost 4% during this time period, in an environment where global bonds and the economy have struggled due to high inflation and interest rates.
At the same time, even though Bridgewater has struggled during recent economic crises, it has managed to hold its ground during several crises of the past. For instance, in 2008, the firm delivered 8.7% in gains at a time when the S&P 500 tumbled by 38.5%. It’s times like these that show the true mettle of a hedge fund boss, and during 2018, Bridgewater delivered 14.6% in returns which were in sharp contrast to the hedge fund industry’s average 6.7% in losses. As for the Pure Alpha 11 fund, it has delivered 11.4% in returns between 1991 and 2022. Finally, 2024 seems to be a breath of fresh air for Dalio’s firm too since during Q1 it posted a strong 16% in returns which were 11 percentage points higher than the hedge fund industry’s average 4.59% in returns.
Coming back to revenue growth, while Fisher’s central point when favoring P/S over P/E is the undue effect of accounting on earnings and by extension on the share price, is it possible that revenue surprises also drive stock prices? If they do, then the merit of using P/S, and particularly lower P/S stocks as an investment, increases and becomes more important. On this front, research from Emory University and the Stern Business School analyzed income statements, balance sheets, and returns data between 1987 and 2003, to check if there’s any relation between revenue surprises and stock returns around earnings announcements.
It revealed that “earnings surprises that are accompanied by revenue surprises signal more persistent earnings growth than similar levels of earnings surprises not accompanied by matching revenues surprises.” In numerical terms, the research concluded that revenue surprises provide another valuable signal to investors since when stocks were screened for revenue and earnings surprises, the difference between abnormal returns in this category was 8.41% which was nearly two percentage points higher than the difference for stocks screened only for earnings surprises.
So, as it appears that revenue is an equally important part of stock valuation, we decided to look at Ray Dalio’s top revenue growth stocks.
To make our list of Ray Dalio’s top growth stocks with 30%+ revenue growth, we first filtered the 230 largest positions of Bridgewater Associates by investment value to pick out only those stocks with an absolute revenue growth greater than 80% for the past three years. Then, these stocks were further filtered with their 1-year revenue growth, and those with a growth higher than 30% were selected. These stocks are ranked by the value of the firm’s stake in them during Q1 2024.
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. Legend Biotech Corporation (NASDAQ:LEGN)
Number of Hedge Fund Investors in Q1 2024: 27
1 Yr Revenue Growth: 144%
Bridgewater Associates’ Q1 2024 Stake: $11.7 million
Legend Biotech Corporation (NASDAQ:LEGN) is a biotechnology company that is developing treatments for melanoma, myeloma, leukemia, and other form of cancers. Since it’s a biotechnology company, key to its stock performance are the progression with drug development, commercialization of developed products, and agreements with large pharma companies for milestone payments. On these fronts, Legend Biotech Corporation (NASDAQ:LEGN)’s leading product is its myeloma treatment called Carvytki. The firm has secured a deal with pharma giant JNJ for this drug, and the latter has already invested $1 billion into the platform. A CAR-T drug, as long as Legend Biotech Corporation (NASDAQ:LEGN) manages to manage FDA expectations for Carvykti and avoids any untoward event as well as scaling up production, it will be able to benefit from the growing market for its drug. Its price to sales ratio is 29.78, indicating high market hopes for the firm.
On its Carvykti sales and manufacturing, two central components for Legend Biotech Corporation (NASDAQ:LEGN)’s hypothesis, here’s what management had to say during its Q1 2024 earnings call:
“Turning to financial developments, CARVYKTI net trade sales for the first quarter were $157 million, which is 100% increase year-over-year.
Sequentially, net sales decreased by $2 million from $159 million in the fourth quarter of last year. This was a result of phasing due to the timing of orders and when they were delivered and billed for, as well as manufacturing testing needed for the upcoming expansion. Importantly, there was growth in patient demand, and, obviously, that was before the recent second line approvals. So we do anticipate continued growth for CARVYKTI, particularly in the second half of the year, as we continue to add more slots and expand our capacity. Right now, there’s no higher priority in the company than making more supply available to the market and reducing the vein-to-vein time. We’re working to expand production from every angle. We are continually increasing production at our Raritan, New Jersey, where we have doubled cell processing capacity since the beginning of 2023.
We are laser focused on completing physical expansion of our Raritan site this year. We plan to double CARVYKTI capacity by the end of 2024 compared to the end of 2023. Our production capacity will be augmented later in the year when our Obelisc facility in Ghent, Belgium is approved for commercial production. Clinical production already started back in January. With the second-line FDA approval, the specifications for manufacturing CARVYKTI were widened, which should give us greater yield going forward. Finally, Legend and J&J expanded a previous agreement with Novartis to perform commercial manufacturing for CARVYKTI through the end of 2029. The increases to our production capacity will help ensure we meet our target of annualized capacity of 10,000 patient slots by the end of 2025.”
9. Duolingo, Inc. (NASDAQ:DUOL)
Number of Hedge Fund Investors in Q1 2024: 43
1 Yr Revenue Growth: 44%
Bridgewater Associates’ Q1 2024 Stake: $12.7 million
Duolingo, Inc. (NASDAQ:DUOL) is a technology company that provides a fully online language learning platform and services. It is an early mover in its industry, which provides it with a large brand recognition that boomed during the pandemic which made Duolingo, Inc. (NASDAQ:DUOL) quite popular among university and job applicants seeking to prove their foreign language capabilities. Its popularity and market share mean that Duolingo, Inc. (NASDAQ:DUOL) has to focus on innovation and product delivery to stay at the top of its industry and ensure aspiring entrants do not steal its share. On this front, its platform now covers more than 40 languages, and Duolingo, Inc. (NASDAQ:DUOL) can also expand its competitive moat by targeting tangential sectors such as physics and mathematics learning. Additionally, Duolingo, Inc. (NASDAQ:DUOL) has 88.4 million users, which are just a fraction of the global population and internet users which provides it with ample room to grow. At the same time, any weakness in its daily average user (DAU) growth will affect the share price and force Duolingo, Inc. (NASDAQ:DUOL) to aggressively expand its platform.
Here’s what Duolingo, Inc. (NASDAQ:DUOL)’s management had to say about its usage metrics during the Q1 2024 earnings call:
“In Q1, we grew revenue and bookings by 45% and 41% respectively, delivered record profitability, and grew DAUs 54% year-over-year. These results show how powerful our product-driven flywheel is. Our excellent product fuels word-of-mouth growth, which in turn provides data to continuously improve the product, ultimately driving higher engagement and subscriber conversion. Our three-pronged approach of teaching better, growing users, and converting them to subscribers continues to be a winning strategy for us. This year, our monetization efforts are focused on optimizing our subscription offerings, including our Family Plan and our third-tier Duolingo Max.
We feel good about the progress we’ve made on Max based on the results of our experiments to date. Because of that, we rolled out Max more broadly in April, and today, roughly 5% to 10% of our DAUs have access to it. We will make it available to more countries and courses in the next few months. We’re also improving our Family Plan experience by streamlining the invite flow and having more engaging social features. Our progress on these initiatives, alongside other monetization initiatives and our current trends give us the confidence to raise our full-year guidance.”
8. e.l.f. Beauty, Inc. (NYSE:ELF)
Number of Hedge Fund Investors in Q1 2024: 33
1 Yr Revenue Growth: 73%
Bridgewater Associates’ Q1 2024 Stake: $17.1 million
e.l.f. Beauty, Inc. (NYSE:ELF) is a California based cosmetics and beauty products company. It is a new age cosmetics company, that is seeking to leverage the growth in US population by offering low cost beauty products to a wider market than traditional, high end companies can offer. e.l.f. Beauty, Inc. (NYSE:ELF) also uses the power of social media to its advantage, which lends it a foothold in a key marketing medium that big firms often struggle to come to terms with. Another key advantage that e.l.f. Beauty, Inc. (NYSE:ELF) enjoys its use of direct to consumer sales. This allows it to rapidly get the products out to its customers and provides it agility in a market that is dominated by fast moving trends and incumbents that often have to deal with retailers. However, recent data suggests that e.l.f. Beauty, Inc. (NYSE:ELF) is struggling to maintain its market share and bled customers during the first quarter of the year. Any further downward movement here could affect the share price.
ClearBridge Investments mentioned e.l.f. Beauty, Inc. (NYSE:ELF) in its Q1 2024 earnings letter. Here is what the firm said:
“ELF, in the consumer staples sector, is the third-largest mass cosmetics brand in the U.S. We believe the flywheel of ELF’s consumer value proposition, its innovation pipeline, and its unique ability to bring prestige-like products to mass consumers and high consumer engagement will enable the company to continue to outgrow the global market. We see significant opportunity for ELF to transform itself from an emerging U.S. color cosmetics brand to a global beauty stalwart by doubling its share in the U.S. over the next few years and gaining share in international and skincare markets. ELF is profitable, balancing growth and earnings, and has an attractive balance sheet.”
