Top 10 Stocks to Buy According to Charles Montanaro’s Hedge Fund

In this article, we examined Charles Montanaro’s portfolio management strategy and approach to investing in small- and mid-cap growth companies. We also reviewed top 10 stocks to buy according to Charles Montanaro’s hedge fund. You can skip our detailed discussion about Charles Montanaro’s investment philosophy and portfolio management strategies and jump directly to Top 5 Stocks to Buy According to Charles Montanaro’s Hedge Fund.

Charles Montanaro, a 65-year-old veteran stock picker, is one of the most prominent value investors who specialize in small- to mid-cap growth companies. He graduated from Durham University in 1976 and spent almost two decades in capital and financial markets before founding Montanaro Asset Management in 1995, an independent investment boutique fund focused exclusively on small- and mid-sized companies. 

The firm’s approach to investing involves buying shares of small- and mid-cap growth companies with the best management teams and strong business models. Charles Montanaro’s investment philosophy appears to be working. In the five years ending in June 2021, his firm’s UK income trust has returned 114% to shareholders, while its NAV has increased 73%, as opposed to the benchmark’s 67% gain.

As of September, Charles Montanaro’s hedge fund managed $829 million in its 13F securities portfolio, with a major emphasis on fast-growing small- to mid-cap technology stocks that represented around 30% of the entire portfolio.

In the past couple of months, information technology stocks have recovered strongly and managed to grow 38% year to date, outpacing S&P 500 gains of 26%. Tech stocks are well-positioned to extend the upside momentum into 2022 as investors are shifting their focus towards growth stocks owing to the rising threat of the Omicron variant.

The most notable information technology stocks to buy according to Charles Montanaro’s hedge fund include Avalara, Inc. (NYSE:AVLR), Unity Software Inc. (NYSE:U), Paycom Software, Inc. (NYSE:PAYC), SiTime Corporation (NASDAQ:SITM) and Tyler Technologies, Inc. (NYSE:TYL). 

Moreover, the UK-based hedge fund is also bullish over the fundamentals of Nova Ltd. (NASDAQ:NVMI) and ANSYS, Inc. (NASDAQ:ANSS). Nova Ltd. (NASDAQ:NVMI) is a process control systems provider to semiconductor companies while ANSYS, Inc. (NASDAQ:ANSS) is engaged in engineering simulation software and services business worldwide. 

As you can see, the fund’s holdings has exciting new names, unlike many other elite funds whose largest holdings are mostly famous blue chip companies like Amazon.com, Inc. (NASDAQ: AMZN), Meta Platforms Inc (NASDAQ: FB) and Alphabet Inc Class A (NASDAQ: GOOGL).

Photo by Umberto on Unsplash

Our methodology:

We made use of Montanaro Asset Management’s 13F portfolio to extract the top 10 stocks as of September. We mostly picked tech and semiconductor stocks from the fund’s portfolio.

We also utilized the data of 867 hedge funds tracked by Insider Monkey to see what other elite funds are thinking about fast-growing stocks.

Top Stocks to Buy According to Charles Montanaro’s Hedge Fund

10. Avalara, Inc. (NYSE:AVLR)

Montanaro Asset Management’s Stake Value: $350,000

Percentage of Montanaro Asset Management’s 13F Portfolio: 0.04%

Number of Hedge Fund Holders: 24

Avalara, Inc. (NYSE:AVLR), a cloud-based global tax compliance platform, saw its shares plunge 20% in the last month and dramatically underperformed year to date. On the other hand, Avalara, Inc. (NYSE:AVLR) posted 42% year-over-year revenue growth in the third quarter. It anticipates fourth-quarter revenue in the range of$183 million. However, Avalara, Inc. (NYSE:AVLR) has yet to find a way to move towards profitability, with expectations for a non-GAAP operating loss between $1.0 million and $3.0 million for the full year.

Avalara, Inc. (NYSE:AVLR) is currently trading around $130, which looks significantly down compared to the average price target of $213. Mizuho Securities analyst Siti Panigrahi recently reiterated a Buy rating on Avalara, Inc. (NYSE:AVLR) and set a price target of $220. 

Of the 867 elite funds tracked by Insider Monkey, 24 were bullish about Avalara, Inc. (NYSE:AVLR) as of September. Alkeon Capital Management and Greg Poole’s Echo Street Capital Management are among the leading stakeholders in the company.

9. Unity Software Inc. (NYSE:U)

Montanaro Asset Management’s Stake Value: $486,000

Percentage of Montanaro Asset Management’s 13F Portfolio: 0.05%

Number of Hedge Fund Holders: 36

Unity Software Inc. (NYSE:U) is one of the best technology stocks to buy because of its growth potential. The company’s third-quarter revenue of $286.3 million jumped 43% year over year and topped expectations on the top and bottom lines. Unity Software Inc. (NYSE:U) expects 29-32% revenue growth for the fourth quarter while full-year revenue is forecast to surpass a billion-dollar level. Unity Software Inc. (NYSE:U) also announced a definitive deal to buy Peter Jackson’s Weta Digital for $1.625 billion, in line with its strategy to enhance market share through acquisitions and investments in organic growth opportunities. 

Unity Software Inc. (NYSE:U) was in 36 hedge funds’ portfolios as of September compared to 29 positions in the previous quarter. Catherine D. Wood’s ARK Investment Management and Brad Gerstner’s Altimeter Capital Management were among the leading shareholders in Unity Software Inc. (NYSE:U).

Like Amazon.com, Inc. (NASDAQ: AMZN), Meta Platforms Inc (NASDAQ: FB) and Alphabet Inc Class A (NASDAQ: GOOGL), Unity Software Inc. (NYSE:U) is a popular stock among elite hedge funds.

8. Paycom Software, Inc. (NYSE:PAYC)

Montanaro Asset Management’s Stake Value: $1.9 million

Percentage of Montanaro Asset Management’s 13F Portfolio: 0.23%

Number of Hedge Fund Holders: 40

Charles Montanaro’s hedge fund looks bullish over the fundamentals of Paycom Software, Inc. (NYSE:PAYC). The firm raised its existing position in the company by 120% in the September quarter. The share price of Paycom Software, Inc. (NYSE:PAYC) soared 36% in the last six months due to robust financial growth. Its third-quarter revenue increased 30.4% from the comparable prior-year period. The company’s outlook also hints at strong support for the upside momentum in the months ahead. Paycom Software, Inc. (NYSE:PAYC) expects revenues in the range of $276.5 million for the December quarter. 

In the third quarter investor letter, Alger, an investment management firm, stated that Paycom Software, Inc. (NYSE:PAYC) is well set to grow. Here is what Alger stated about Paycom Software, Inc. (NYSE:PAYC):

“Paycom Software, Inc. was among the top contributors to performance. Paycom Software is a leading provider of comprehensive, cloud-based human capital management (“HCM”) software delivered as software as a service (SaaS). Paycom provides functionality and data analytics that businesses need to manage the complete employment lifecycle, from recruitment to retirement, with a focus on businesses with 50 to 5,000 employees, which represent 72% of U.S. employees. Its HCM functions include talent acquisition, time and labor management, payroll, talent management and human resources. The stock outperformed as a result of the company reporting a robust second quarter that exceeded consensus expectations across key metrics, including its recurring revenue, despite a tight labor market. Paycom continues driving strong growth via its leading technology while the pandemic has created increased demand for its self-service capabilities for employees that are increasingly being embraced by businesses. Its best-in-class sales organization, which includes a dedicated team for smaller employers and direct sales reps for large companies also supported the company’s second quarter results. We believe the second quarter illustrates how Paycom is currently positioned to capture market share, deliver attractive revenue growth and profit margins, and producing upside earnings surprises.”

7. SiTime Corporation (NASDAQ:SITM)

Montanaro Asset Management’s Stake Value: $4.6 million

Percentage of Montanaro Asset Management’s 13F Portfolio: 0.55%

Number of Hedge Fund Holders: 21

Charles Montanaro’s hedge fund’s strategy of increasing its existing stake in SiTime Corporation (NASDAQ:SITM) by more than 900% appears to be working. This is because shares of SiTime Corporation (NASDAQ:SITM) surged 15% in the last month alone, extending the twelve-month gains to 246%. Despite the recent gains, the small-cap SiTime Corporation (NASDAQ:SITM) still appears like one of the best information technology stocks to buy. 

SiTime Corporation (NASDAQ:SITM) continues to experience robust demand for its resonators and clock integrated circuits, and various types of oscillators from end markets such as telecommunications, infrastructure, industrial, automotive, mobile, and aerospace. This is also reflected in its financial numbers. SiTime Corporation (NASDAQ:SITM) generated $63 million in third-quarter revenue, up 92.9% from the $32.7 million in the past year period and increased 41.7% from the second quarter of 2021.

Of the 867 elite funds tracked by Insider Monkey, 21 were bullish about SiTime Corporation (NASDAQ:SITM) as of September. Douglas T. Granat’s Trigran Investments and Driehaus Capital were among the leading stakeholders in the company.

6. Tyler Technologies, Inc. (NYSE:TYL)

Montanaro Asset Management’s Stake Value: $10 million

Percentage of Montanaro Asset Management’s 13F Portfolio: 1.21%

Number of Hedge Fund Holders: 30

The stock price of mid-sized Tyler Technologies, Inc. (NYSE:TYL) is set to extend the upside momentum due to robust demand for its integrated information management solutions and services. Tyler Technologies, Inc. (NYSE:TYL) posted 61% revenue growth in the third quarter while the total backlog rose 14.3% to $1.77 billion. Charles Montanaro’s hedge fund held $10.8 million worth of stake in Tyler Technologies, Inc. (NYSE:TYL) as of September. 

The stock price of Tyler Technologies, Inc. (NYSE:TYL) appreciated 20% since the beginning of this year, with expectations for more upside ahead amid a strong financial outlook. Tyler Technologies, Inc. (NYSE:TYL) expects full-year adjusted earnings per share in the range of $6.94-$7.02 on revenue of $1.577-$1.597 billion.

As of September, 30 elite funds were bullish about Tyler Technologies, Inc. (NYSE:TYL), according to data tracked by Insider Monkey. Ken Griffin’s Citadel Investment Group was among the leading stakeholders in the company with a stake worth $71.35 million.

Like Amazon.com, Inc. (NASDAQ: AMZN), Meta Platforms Inc (NASDAQ: FB) and Alphabet Inc Class A (NASDAQ: GOOGL), Tyler Technologies, Inc. (NYSE:TYL) is a popular stock among elite hedge funds.