We recently compiled a list of the 10 Best Breakout Stocks To Invest In Right Now. In this article, we are going to take a look at where ServiceNow Inc. (NYSE:NOW) stands against the other breakout stocks.
Since 1950, the S&P 500 has posted at least a 15% gain through September on 17 occasions. In those years, the index rose a median of 5.4% in the fourth quarter and ended the year with gains in all but three instances, according to Keith Lerner, co-chief investment officer at Truist Advisory Services. Strong gains in U.S. stocks this year suggest a positive outlook for the remainder of 2024, if historical trends hold.
The S&P 500 is currently up 20% year-to-date, nearing a record high and poised for its best January-to-September performance since 1997. Optimism around a potential ‘soft landing’ has fueled this rally, alongside a recent 50 basis point rate cut by the central bank.
Overall, inflation in the U.S. is steadily nearing the Federal Reserve’s 2% annual target. Analysts suggest that the ongoing moderation in consumer prices could prompt further interest rate cuts to prevent a spike in unemployment. The personal consumption expenditures price index, a key inflation measure monitored by the Fed, increased by just 0.1% in the past month. This brings the 12-month inflation rate to 2.2%, down from 2.5% in July, marking its lowest level since February 2021. Moreover, Fed officials have seem to have shifted their focus from combating inflation to prioritizing support for a labor market showing signs of slowing. During their recent meeting, policymakers signaled the possibility of a half-percentage-point cut this year, followed by a full-point reduction in 2025.
That said, the current financial landscape reflects the Fed’s cautious strategy to engineer a soft landing for the economy—curbing inflation without inducing a recession. Gregory Daco, Chief Economist at EY-Parthenon, observes that the U.S. economy is gradually decelerating, with both consumers and businesses adopting more cautious spending behaviors due to a tightening labor market and rising costs. Although consumer spending hasn’t seen a sharp decline, Daco suggests that slower growth in disposable income could lead to more subdued spending in 2025. He projects consumer spending growth to slow to an average of 2.5% in Q4 2024, dropping further to 2% in 2025.
On another front, Mark Spitznagel, Chief Investment Officer and founder of Universa, believes the U.S. is on the brink of a significant downturn due to the high levels of debt and sustained high interest rates. “The clock is ticking, and we are entering black swan territory,” he told Reuters, warning that the recent “disinversion” of a key segment of the U.S. Treasury yield curve—a crucial recession indicator—signals an impending sharp downturn. Spitznagel anticipates a recession could hit as early as this year, prompting the Fed to slash rates aggressively from the current 4.75%-5% range and potentially returning to quantitative easing (QE), or bond buying.
Our Methodology
To compile our list of the best breakout stocks, we analyzed the holdings of the IBD Breakout Opportunities ETF and ranked them based on the number of hedge funds that initiated long positions in Q2 2024. From this group, we identified the top breakout stocks that are the most widely held by hedge funds.
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).
A team of software engineers at desks working on code for a cutting-edge cloud computing solution.
ServiceNow Inc. (NYSE:NOW)
Number of Hedge Fund Holders: 97
ServiceNow Inc. (NYSE:NOW) is a cloud-based software company that offers a platform for digital workflows. Its role as an AI platform for business transformation is expanding rapidly, with NowAssist becoming the fastest-growing product in the company’s history, doubling its net new annual contract value quarter-over-quarter. In Q2, ServiceNow closed 11 deals, each worth over $1 million.
Bernstein recently reaffirmed its Outperform rating on ServiceNow Inc. (NYSE:NOW), setting a price target of $906. The firm sees the software company as a strong “quality compounder,” particularly for long-term investors. Bernstein suggested that any significant price pullback could provide a strategic opportunity to increase positions in the company, as seen during previous market downturns that created attractive buying opportunities.
ServiceNow Inc. (NYSE:NOW) continues to excel in customer service management, generating over $1 billion in revenue, and maintains a strong presence in the financial services sector, serving all of the top 24 global banks. Future growth is anticipated to be driven by increasing enterprise investment in AI, a market projected to reach $3 trillion by 2027.
At the end of Q2 2024, 91 of the 912 hedge funds tracked by Insider Monkey held stakes in ServiceNow Inc. (NYSE:NOW), positioning it as one of the top breakout stocks to consider.
Lakehouse Global Growth Fund stated the following regarding ServiceNow, Inc. (NYSE:NOW) in its April 2024 investor letter:
“US-based software company, ServiceNow, Inc. (NYSE:NOW), provided another strong result, continuing its long and consistent track record of 20%-plus revenue growth combined with healthy profitability. Subscription revenues grew 25% year-on-year to $2.5 billion and free cash flow grew 47% year-on-year to $1.2 billion. The company’s core operating metrics were also impressive with remaining performance obligations growing 26% year-on-year to $17.7 billion (i.e. roughly 2x 2023 revenue) and renewal rates holding steady at 98%. Performance was evenly spread across segments, products, and geographies, with notable strength in the US federal government. The company now boasts 1,933 customers generating in excess of $1 million in Annual Contract Value (ACV), which is pleasing to see as it implies multiple solutions are involved and that the company’s platform model is increasingly resonating with customers. In our view, ServiceNow is one the highest quality software businesses globally as the combination of consistent growth at scale, robust free cash flow generation and a large addressable market make it a compelling opportunity.”
Overall NOW ranks 1st on our list of the breakout stocks to invest in. While we recognize the potential of NOW as an investment, we believe certain deeply undervalued AI stocks offer greater prospects for higher returns in a shorter period. If you’re seeking an AI stock with even more promise than NOW and trading at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. This article is originally published at Insider Monkey.
