Is The Party Over for These Growth Stocks?

The world of investing in the past few decades has broadly been divided in two categories- value and growth. Whereas value investors generally look for mature companies with decent cash flows that are trading at a discount, growth investors tend to prefer companies in nascent stages that can grow at a rapid pace. The strategy that growth investors employ to a large degree resembles the strategies used by venture capitalists, hence, their returns also exhibit the same characteristics. All it takes for a growth investor to generate decent returns is to bet on several stocks that show potential and hope that a handful of them go on to become multi-baggers.

However, there is one distinct advantage that growth investors enjoy over VCs which allows them to perform well even during tiring times – liquidity. While VC firms find it extremely hard to sell a portfolio company if it is showing signs of turbulence, growth investors can at any time sell a stock if they find that it’s not performing to its potential. Having said that, in this post, we will take a look at five growth stocks that smart money tracked by us was dumping going into the second half of 2016 and will discuss how these stocks have performed lately.

We believe that imitating hedge funds and other large institutional investors can be helpful in identifying stocks capable of outperforming the broader market. Through extensive research that covered portfolios of several hundred large investors between 1999 and 2012, we determined that following the small-cap stocks that large money managers are collectively bullish on, can generate monthly returns nearly 1.0 percentage points above the market (see the details here).

#5 Builders FirstSource, Inc. (NASDAQ:BLDR)

– Hedge Funds with Long Positions (as of June 30): 33

– Value of Hedge Funds’ Holdings (as of June 30): $387.28 Million

Builders FirstSource, Inc. (NASDAQ:BLDR) became a hot stock among hedge funds last year after the company announced its $1.6 billion acquisition of ProBuild Holdings, which at that time was viewed as highly accretive to its earnings. However, the stock has lost some of its appeal to smart money since then. During  the second quarter, the ownership of Builders FirstSource, Inc. (NASDAQ:BLDR) among hedge funds covered by us inched down by two, while the aggregate value of their holdings in it saw a modest rise of 15%. Shares of the building material supplier have been on a downward spiral since the start of September, but are still trading in the green year-to-date. For its fiscal 2016 third quarter, analysts are expecting the company to report EPS of $0.40 on revenue of $1.80 billion, considerably higher than the EPS of $0.31 on revenue of $1.7 billion it posted for the same quarter last year.

#4 Cosan Ltd (USA) (NYSE:CZZ)

– Hedge Funds with Long Positions (as of June 30): 16

– Value of Hedge Funds’ Holdings (as of June 30): $150.78 Million

Considering that Cosan Ltd (USA) (NYSE:CZZ)’s stock has had a stellar rally in 2016, rising by 148% year-to-date, it might surprise some people that the company has been featured in this list. However, one needs to take into account that Brazil, where Cosan Ltd (USA) (NYSE:CZZ) is based, was facing extreme political turmoil till a month back and this turmoil could have influenced some of the hedge funds to dump their holdings in the stock despite its performance. The number of hedge funds covered by us that were long Cosan declined by 20% during the second quarter, but the aggregate value of their holdings in it jumped by 35.7% during the same time. According to analysts who track Cosan, the fair value of its stock lies in the $9-$11 range, which suggests little upside potential as the stock is trading within that range currently. On October 7, analysts at Standpoint Research downgraded the stock to’Hold’ from ‘Buy’.

#3 Wayfair Inc (NYSE:W)

– Hedge Funds with Long Positions (as of June 30): 23

– Value of Hedge Funds’ Holdings (as of June 30): $487.57 Million

Moving on, the ownership of Wayfair Inc (NYSE:W) among investors tracked by us declined by seven during the second quarter, whereas the aggregate value of their holdings in it shrunk by almost 14%. Funds that sold their entire stake in the company during that period included James Crichton’s Hitchwood Capital Management and Paul Marshall and Ian Wace’s Marshall Wace LLP. Though Wayfair Inc (NYSE:W)’s stock has mostly been range bound since past one year, it is currently trading down by 24% year-to-date. At the end of August the online furniture retailer acquired messaging application Trumpit for an undisclosed sum of money with the intention of using the latter’s technology to expand its customer service offerings. Some of the analysts who track Wayfair think that the company can grow its top-line in the low-teens range over the next five years and can achieve low single-digit profit margins going forward. At the beginning of this month, analysts at Canaccord Genuity reiterated their ‘Buy’ rating and $55 price target on the stock, which represents an upside potential of 55.23%.

#2 Vipshop Holdings Ltd – ADR (NYSE:VIPS)

– Hedge Funds with Long Positions (as of June 30): 25

– Value of Hedge Funds’ Holdings (as of June 30): $604.27 Million

During the second quarter, the number of tracked by us that were long Vipshop Holdings Ltd – ADR (NYSE:VIPS) fell by 17 and the aggregate value of their holdings in it shrunk by $275 million. However, some of those funds might be regretting their decisions now as Vipshop Holdings Ltd – ADR (NYSE:VIPS)’s stock recouped all of its second-quarter loss during the next three months and is currently trading down by 11% year-to-date. The Chinese online discount retailer reported better-than-expected numbers for its second quarter in August, which prompted several analysts to up their price target on its stock. Among those were analysts Nomura, who on October 17, increased the target to $20 from $17 reiterating a ‘Buy’ rating.

#1 Ctrip.Com International Ltd (ADR) (NASDAQ:CTRP)

– Hedge Funds with Long Positions (as of June 30): 43

– Value of Hedge Funds’ Holdings (as of June 30): $2.21 Billion

Ctrip.Com International Ltd (ADR) (NASDAQ:CTRP) was another Chinese growth story that saw its popularity suffer a big drop during the second quarter among hedge funds covered by us as its ownership among them slid by 24 and the aggregate value of their holdings in it fell by $232 million. Similar to Vipshop Holdings , Ctrip.Com International Ltd (ADR) (NASDAQ:CTRP)’s stock has also performed remarkably well since the beginning of second-half of 2016, which has enabled it to recover from the beating it took earlier in the year. Till some time ago, a lot of analysts were apprehensive of Ctrip.Com’s strategy to invest in its rivals like Qunar and eLong, Inc. as they feared it will divert the company from focusing on its own organic growth. However, today most of them consider those consolidations as a clever move made by Ctrip.Com to bring down the competition in the Chinese travel market and strengthen its market position. Ctrip.Com’s stock currently sports an average rating of ‘Overweight’ and an average price target of $52.19 from the 28 leading analysts on the Street.

Disclosure: None