Smart Money Is Piling Into These Growth Stocks

Many investors and analysts are warning that the markets are overvalued, which could lead to a severe correction in the near-term should the Fed decide to raise interest rates this year. However, that possibility shouldn’t dissuade anyone from finding the pockets of value that still exist in the market, especially for long-term-focused investors. In particular, stocks with rapidly growing top-lines hold the potential to deliver strong returns even should the market enter a bear phase.

Having said that, we are going to take a look at four stocks that have both strong revenue growth and enjoyed significant popularity among the smart money in our database during the second quarter. Those stocks are Xactly Corporation (NYSE:XTLY), Century Communities, Inc (NYSE:CCS), Sprouts Farmers Market Inc (NASDAQ:SFM), and Beacon Roofing Supply, Inc. (NASDAQ:BECN).

At Insider Monkey, we track around 750 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details).

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Hedge funds tracked by Insider Monkey increased their holdings in sales software company Xactly Corporation (NYSE:XTLY) significantly during the second quarter, with 12 funds holding shares at the end of June, up from seven a quarter earlier, while the value of their holdings increased by more than four-fold to $31.49 million. Xactly’s fiscal second quarter 2017 revenue came in at $24 million, a 31% increase from the second quarter of its fiscal 2016, and above the consensus estimate of $23.37 million. Xactly has strong organic growth and expects to achieve profitability by the end of this year. Xactly expects $23.3 million-to-$24.1 million in revenue for its fiscal third quarter and $96.0 million-to-$97.5 million for its full 2017 fiscal year. Jim Simons‘ Renaissance Technologies added a 438,900-share position in Xactly Corporation (NYSE:XTLY) to its portfolio during the second quarter. The stock has gained over 74% so far this year.

At the end of the second quarter, 12 hedge funds in our database were long Century Communities, Inc (NYSE:CCS), compared to 10 funds a quarter earlier. The home building company’s home sales revenue jumped by 38% to reach $257.2 million during the second quarter. Century Communities, Inc (NYSE:CCS) CEO Dale Francescon said during that earnings call that the double-digit gains in its revenue as well as a 36% rise in adjusted gross margin will support the further growth initiatives of the company. For the full year, Century Communities, Inc (NYSE:CCS) expects home sales revenue to come in between $850 million and $1 billion, compared to $734.49 million in 2015. Howard Marks’ Oaktree Capital Management owns around 1.47 million shares of Century Communities as of the end of June.

On the next page we’ll continue our discussion of hedge funds’ favorite stocks with strong revenue growth, with a look at two more companies.

A total of 22 funds in our system held shares of Sprouts Farmers Market Inc (NASDAQ:SFM) on June 30, up from 18 funds at the end of March. In the second quarter, the Phoenix, Arizona-based organic grocery store operator reported $1 billion in revenue, representing 14% year-over-year growth, though that figure missed analysts’ estimate of $1.04 billion. Last month, Sprouts Farmers Market slashed its full-year same-store sales estimate to 1.5%-to-2.5% from its prior forecast of 3.5%-to-4.5%. The company also lowered its full-year EPS estimate to $0.83-to-$0.86 from $0.96-to-$0.98. The company cited “significant ongoing deflation” and enhanced promotional efforts as reasons for the revisions. Nonetheless, the company has promising avenues for growth in the future due to rising demand for organic food. Sprouts now has around 240 stores in 13 states, significantly up from less than 50 stores in 2011. Adam Weiss’ Stillwater Investment Management owns 632,300 shares of the company as of the end of the second quarter.

In the second quarter, the hedge funds tracked by Insider Monkey actively piled into Beacon Roofing Supply, Inc. (NASDAQ:BECN), which posted record breaking net sales of $1.15 billion in the third quarter, representing impressive 60% year-over-year growth. Organic sales in the quarter also jumped by 8.7%, mainly due to its greenfield investments over the past few years, as well as favorable weather conditions in Dallas. Net income for the quarter totaled $41.1 million, compared to $28.3 million in the same period of 2015. The stock is up by 4% year-to-date. Ken Griffin’s Citadel Investment Group was one of 40 hedge funds in our database with a long position in Beacon Roofing Supply, Inc. (NASDAQ:BECN) at the end of the second quarter, up from 29 at the end of the first quarter.

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