In this article, we discuss the 11 best growth stocks to buy according to hedge funds.
Even though past performance is not always a good indicator of future growth patterns, it is nonetheless an important consideration that investors must take into account before making rash choices. Growth stocks, which derive their value from expectations of future earnings and the probability of beating the overall market because of disruptive technologies, have had a stellar past few months. In 2020, the Russell 1000 Growth ETF returned more than 38%, far outperforming the 2.7% returns for the Russell 1000 Value ETF.
A lot of this growth was pandemic-driven. As the economy reopened and supply chain problems led to inflation fears, the Russell 1000 Value ETF beat the Russell 1000 Growth ETF for the first time since 2001, according to a report by Bank of America. However, the government has dismissed these concerns and pledged to withdraw COVID-19 support for businesses as the economy normalizes. In this environment, investors eager to explore growth opportunities should follow the smart money.
One way of doing that is to find out what institutional investors are up to. According to a database of 873 hedge funds tracked by Insider Monkey, some of the best growth stocks to buy according to hedge funds include Amazon.com, Inc. (NASDAQ:AMZN), Facebook, Inc. (NASDAQ:FB), and Uber Technologies, Inc. (NYSE:UBER), among others discussed in detail below. As digital offerings grow in importance – the digital economy accounted for close to 10% of the US GDP in 2019 – growth stocks are expected to explode in value.
Our Methodology
With this context in mind, here is our list of the 11 best growth stocks to buy according to hedge funds. The firms were selected using data from the 873 hedge funds tracked by Insider Monkey.
Only those that saw an increase in the number of hedge funds having stakes in the firm in the second quarter, as compared to the first quarter of 2021, were picked. The list is compiled according to the number of hedge funds having stakes in each stock.
Special importance was assigned to the basic business fundamentals and analyst ratings for each firm to provide readers with some context so they can make more informed investment choices.
Why do we care about hedge fund sentiment? Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 86 percentage points since March 2017. Between March 2017 and July 2021 our monthly newsletter’s stock picks returned 186.1%, vs. 100.1% for the SPY. Our stock picks outperformed the market by more than 86 percentage points (see the details here). That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Best Growth Stocks To Buy According To Hedge Funds
11. Global Payments Inc. (NYSE:GPN)
Number of Hedge Fund Holders in Q2: 66
Number of Hedge Fund Holders in Q1: 62
Global Payments Inc. (NYSE:GPN) is a Georgia-based firm that provides payments technology and software solutions. It is placed eleventh on our list of 11 best growth stocks to buy according to hedge funds.
On September 9, investment advisory BMO Capital kept an Outperform rating on Global Payments Inc. (NYSE:GPN) stock and raised the price target to $217 from $206. James Fotheringham, an analyst at the advisory, issued the ratings update.
Out of the hedge funds being tracked by Insider Monkey, Connecticut-based investment firm Lone Pine Capital is a leading shareholder in Global Payments Inc. (NYSE:GPN) with 5.5 million shares worth more than $1 billion.
10. Thermo Fisher Scientific Inc. (NYSE:TMO)
Number of Hedge Fund Holders in Q2: 87
Number of Hedge Fund Holders in Q1: 79
Thermo Fisher Scientific Inc. (NYSE:TMO) is ranked tenth on our list of 11 best growth stocks to buy according to hedge funds. The company operates in the life sciences tools and services sector. It is headquartered in Massachusetts.
On September 23, investment advisory Cowen maintained an Outperform rating on Thermo Fisher Scientific Inc. (NYSE:TMO) stock and raised the price target to $655 from $560, noting the firm was a core long-term holding due to track record of management.
At the end of the second quarter of 2021, 87 hedge funds in the database of Insider Monkey held stakes worth $7.3 billion in Thermo Fisher Scientific Inc. (NYSE:TMO), up from 79 in the preceding quarter worth $6.2 billion.
Just like Amazon.com, Inc. (NASDAQ:AMZN), Facebook, Inc. (NASDAQ:FB), and Uber Technologies, Inc. (NYSE:UBER), Thermo Fisher Scientific Inc. (NYSE:TMO) is one of the growth stocks that institutional investors are buying.
In its Q2 2021 investor letter, DEVON Equity Management, an asset management firm, highlighted a few stocks and Thermo Fisher Scientific Inc. (NYSE:TMO) was one of them. Here is what the fund said:
“The broad response to the COVID pandemic from the healthcare, pharmaceutical, and life science industries has been nothing short of incredible.
Whilst Vaccine makers understandably garner the highest profile, Thermo Fisher (6.2% of NAV) should be considered one of the outstanding performers, reflected in their ‘COVID related revenue’ hitting US$9.4bn in the 12 months since March 2020 (we appreciate measuring ‘contribution’ to the pandemic by ‘dollars’ generated is a little crude – but ultimately it does tell us something).
Ever the short-termist, Mr Market has looked to the inevitable slowdown in COVID related revenue uneasily – questioning whether it might mean a decline in Earnings come 2022. These concerns resulted in TMO shares declining 5% since their November 2020 peak, the worst performer of our Top 10 holdings.
Fortunately, we look at the COVID dynamic for Thermo in the diametrically opposite fashion.
We think Thermo’s response to COVID has bolstered their competitive positon in multiple verticals, and meaningfully enhanced the long term earnings potential of the company:
Firstly, Thermo came from ‘also-ran’ to leading player in diagnostic testing in 6 months. In ordinary times, this might be expected to take 5+ years. As demand for COVID testing inevitably declines, the capacity Thermo built during 2020 will be filled with demand from non-COVID diagnostic tests, a fast growing area before the pandemic with improved prospects in light of the role testing is playing in the COVID response.
Secondly, Thermo invested heavily…”[read the entire letter here]
9. Square, Inc. (NYSE:SQ)
Number of Hedge Fund Holders in Q2: 94
Number of Hedge Fund Holders in Q1: 92
Square, Inc. (NYSE:SQ) is placed ninth on our list of 11 best growth stocks to buy according to hedge funds. The company markets payments solutions and is headquartered in California.
On September 15, investment advisory Evercore ISI reiterated an Outperform rating on Square, Inc. (NYSE:SQ) stock and raised the price target to $371 from $361. David Togut, an analyst at the advisory, issued the ratings update.
At the end of the second quarter of 2021, 94 hedge funds in the database of Insider Monkey held stakes worth $10 billion in Square, Inc. (NYSE:SQ), up from 92 the preceding quarter worth $9 billion.
Along with Amazon.com, Inc. (NASDAQ:AMZN), Facebook, Inc. (NASDAQ:FB), and Uber Technologies, Inc. (NYSE:UBER), Square, Inc. (NYSE:SQ) is one of the growth stocks that hedge funds are buying.
In its Q1 2021 investor letter, RiverPark Funds, an asset management firm, highlighted a few stocks and Square, Inc. (NYSE:SQ) was one of them. Here is what the fund said:
“We established a position in leading Financial Technology provider Square during the quarter. Through one integrated system, SQ is a hybrid of two businesses: its Seller Business (charging small and medium-sized businesses about 3% for transaction payment processing, plus other services such as instant funds access, and software for everything from customer engagement to payroll), and its Cash App (originally for person-to-person cash transfers and now a growing digital financial services provider for consumers).
The combined business has grown gross profit at a 37% CAGR over the past five years to $2.7 billion (due to pass through costs, gross profit is more reflective of top-line growth) and we believe that the company has an enormous long-term runway, as it has less than a 2% share of a more than $160 billion market. It is our view that the company’s Cash App (which has grown
from nothing in 2015 to $1.2 billion gross profit last year) has a particularly large opportunity with its powerful ecosystem of digital financial services including digital wallets, direct deposits, stock trading, bitcoin trading, and business and tax services, which are all relatively new. The vast majority of Cash App’s more than 36 million users are younger and, importantly, are willing to replace their bank and other financial services accounts with the app.
We estimate that the company can grow its gross profit more than 30% and EBITDA more than 50% annually for the foreseeable future, and while most of the company’s current profit is from its Seller Business, we believe most of Square’s future value will be from its Cash App business.”
8. Sea Limited (NYSE:SE)
Number of Hedge Fund Holders in Q2: 104
Number of Hedge Fund Holders in Q1: 98
Sea Limited (NYSE:SE) is a Singapore-based technology firm with interests in the ecommerce, entertainment, and fintech businesses. It is ranked eighth on our list of 11 best growth stocks to buy according to hedge funds.
On September 15, investment advisory Stifel upgraded Sea Limited (NYSE:SE) stock to Buy from Hold and raised the price target to $400 from $325, underlining that the firm was an industry leader in the ecommerce and gaming sectors with strong growth ahead.
At the end of the second quarter of 2021, 104 hedge funds in the database of Insider Monkey held stakes worth $12.2 billion in Sea Limited (NYSE:SE), up from 98 the preceding quarter worth $10.4 billion.
In addition to Amazon.com, Inc. (NASDAQ:AMZN), Facebook, Inc. (NASDAQ:FB), and Uber Technologies, Inc. (NYSE:UBER), Sea Limited (NYSE:SE) is one of the growth stocks that is attracting the attention of social media users.
In its Q4 2020 investor letter, Hayden Capital, an asset management firm, highlighted a few stocks and Sea Limited (NYSE:SE) was one of them. Here is what the fund said:
“Sea Ltd (SE): When I wrote our Q4 2019 letter about Shopee launching a Brazilian business, it seemed very few investors or competitors knew or cared.
A year ago, I wrote: “This is the first test for the ecommerce marketplace outside of its Southeast Asia home base. Will the platform’s fun and addicting features overcome a lack of local knowledge and presence? It’s hard to predict consumer behavior and how accepting users will be to a platform – especially one that’s a foreign culture and 10,000 miles away. The only way to know is to experiment and watch the results closely.
Empirically though, it seems that what consumers find entertaining in Asia, generally translates well to Brazil (and Shopee really is as much an entertainment platform, as an ecommerce one).
For example, just look at the top 10 free apps in Brazil. Two are utility messaging apps, so we’ll ignore those (WhatsApp and
Facebook Messenger). But among the remaining eight apps, they’re all entertainment based and overwhelmingly Asian. Four are from China (Kwai, TikTok, VStatus, TikTok Lite), two from Singapore (Free Fire and Shopee, both Sea Ltd apps), and one from the US (Instagram). The commonality is that all these apps are experts at creating addictive habits, as evidenced by their personalized recommendations, avg usage time, number of logins per day per user, etc.” (LINK)
I distinctly remember having conversations with several Brazilian hedge funds as recently as last summer who were investors in Sea Ltd. When the topic of Brazil came up, many of them didn’t even know Shopee was operating in their own backyard!
Part of this stems from the fact that Shopee..”[read the entire letter here]
7. Salesforce.com, Inc. (NYSE:CRM)
Number of Hedge Fund Holders in Q2: 108
Number of Hedge Fund Holders in Q1: 91
Salesforce.com, Inc. (NYSE:CRM) is a California-based company that provides enterprise cloud computing solutions. It is placed seventh on our list of 11 best growth stocks to buy according to hedge funds.
On September 24, investment advisory RBC Capital maintained an Outperform rating on Salesforce.com, Inc. (NYSE:CRM) stock and raised the price target to $325 from $310, noting that the firm was a market leader in the software services sector.
Out of the hedge funds being tracked by Insider Monkey, Washington-based investment firm Fisher Asset Management is a leading shareholder in Salesforce.com, Inc. (NYSE:CRM) with 13.4 million shares worth more than $3.2 billion.
Amazon.com, Inc. (NASDAQ:AMZN), Facebook, Inc. (NASDAQ:FB), and Uber Technologies, Inc. (NYSE:UBER) are some of the top growth stocks to buy now, just like Salesforce.com, Inc. (NYSE:CRM).
In its Q1 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Salesforce.com, Inc. (NYSE:CRM) was one of them. Here is what the fund said:
“We added to our software-as-a-service (SaaS) exposure with the initiation of SaaS leader salesforce.com, which develops software for customer relationship management (we added Workday, which enterprise resource planning applications, last quarter). Saleforce.com is well-positioned in the most attractive end markets in software and will benefit from secular drivers such as remote work and the digital transformation. Salesforce.com is a sustainability leader as well, with a commitment to carbon-neutral cloud, toward which it has set a goal of 100% renewable energy for global operations by fiscal year 2022. The company has a strong focus on equality, in terms of equal rights, pay, education and opportunity. As a data company it has been leading on workforce disclosures and seeks to have 50% of its U.S. workforce made up of underrepresented groups by 2024.”
6. Netflix, Inc. (NASDAQ:NFLX)
Number of Hedge Fund Holders in Q2: 113
Number of Hedge Fund Holders in Q1: 110
Netflix, Inc. (NASDAQ:NFLX) is ranked sixth on our list of 11 best growth stocks to buy according to hedge funds. The firm owns and runs a streaming platform and provides other entertainment services as well. It operates from California.
On October 1, investment advisory Guggenheim maintained a Buy rating on Netflix, Inc. (NASDAQ:NFLX) stock and raised the price target to $685 from $600, noting the popularity of a new hit show on the service was indicative of the unique value proposition of the firm.
Out of the hedge funds being tracked by Insider Monkey, Chicago-based firm Citadel Investment Group is a leading shareholder in Netflix, Inc. (NASDAQ:NFLX) with 4.6 million shares worth more than $2.4 billion.
In its Q1 2021 investor letter, Polen Capital, an asset management firm, highlighted a few stocks and Netflix, Inc. (NASDAQ:NFLX) was one of them. Here is what the fund said:
“We purchased Netflix in March, initiating a 3% position in the Portfolio. We believe Netflix is a highly competitively advantaged company. It has recently met all our investment guardrails, and we anticipate it will remain sustainably above our guardrails over the next five years and beyond. We know Netflix for its ubiquitous streaming service and deep library of owned content. The company has made investments in this content (currently running at nearly $20 billion/year), generally keeping subscribers highly engaged and loyal to their service. The company has number one market share in 99% of markets globally, but it is our view that video streaming on-demand is still an underpenetrated space with many years of attractive growth likely ahead. The service is also relatively affordable at roughly $11/month on average globally.
We believe Netflix’s growth in content spend is beginning to moderate, which could allow margin expansion to continue for many years when paired with ongoing subscriber growth and price increases. While there is competition from the likes of Apple (Apple TV+), Amazon (Prime Video), Disney (Disney+ and Hulu), and others, we believe there can be a handful of winners in this industry. Already, we see many people subscribe to multiple streaming video services, with Netflix being their “anchor” service. That said, the barriers to entry are high, and we believe they are getting higher given the substantial amount of capital and size of the subscriber base required to maintain a competitive service for both viewers and content producers. Over the next five years, we expect Netflix’s earnings growth to be approximately 30% annualized and free cash flow to grow at an even higher rate.”
5. Uber Technologies, Inc. (NYSE:UBER)
Number of Hedge Fund Holders in Q2: 135
Number of Hedge Fund Holders in Q1: 130
Uber Technologies, Inc. (NYSE:UBER) is placed fifth on our list of 11 best growth stocks to buy according to hedge funds. The firm markets proprietary technology applications and is headquartered in California.
On September 22, investment advisory JPMorgan reiterated an Overweight rating on Uber Technologies, Inc. (NYSE:UBER) stock with a price target of $72. Doug Anmuth, an analyst at the advisory, issued the ratings update.
Out of the hedge funds being tracked by Insider Monkey, California-based investment firm Altimeter Capital Management is a leading shareholder in Uber Technologies, Inc. (NYSE:UBER) with 24 million shares worth more than $1.2 billion.
RiverPark Advisors, LLC, in its Q4 2020 investor letter, mentioned Uber Technologies, Inc. (NYSE:UBER). Here is what the fund has to say in its letter:
“UBER was also a strong contributor, as shares rallied following the approval of California’s Proposition 22 by voters, allowing the company’s California-based drivers to remain independent contractors (rather than become more expensive employees). We believe this news is not just about the 10%-15% of Uber’s revenue tied to California, but the influence this will have on other states reassessing driver pay. UBER also reported strong third quarter results with Delivery Gross Bookings growing 135% year-over-year which nearly fully offset a reduction in Mobility Gross Bookings, which were down 50% year over year. Total Gross Bookings for the quarter were down only 10% year over year as compared with down 35% last quarter.
Despite the COVID disruption, UBER remains the undisputed global leader in ride sharing (44% of the Company’s third quarter revenue), with greater than 50% share in every major region in which it operates. The company is also a leader in food delivery (46% of revenue), where it is number one or two in the more than 25 countries in which it operates. We view UBER as more than just ride sharing and food delivery, but also as a global mobility platform with the ability to sell to its more than 100 million users (by comparison, Amazon Prime has 130+ million members) and penetrate new markets of on-demand services, such as grocery delivery, truck brokerage and worker staffing for shift work. At its current $96 billion market capitalization, UBER trades at only 6x next year’s revenue from its two core businesses. Additionally, the company has substantial, seemingly unrecognized, value in its several nascent development businesses and another $12 billion in equity stakes in synergistic businesses around the world.”
4. Apple Inc. (NASDAQ:AAPL)
Number of Hedge Fund Holders in Q2: 138
Number of Hedge Fund Holders in Q1: 127
Apple Inc. (NASDAQ:AAPL) is a California-based technology firm with a large stake in the consumer electronics business. It is ranked fourth on our list of 11 best growth stocks to buy according to hedge funds.
On September 29, investment advisory UBS maintained a Buy rating on Apple Inc. (NASDAQ:AAPL) stock with a price target of $175. David Vogt, an analyst at the advisory, issued the ratings update.
At the end of the second quarter of 2021, 138 hedge funds in the database of Insider Monkey held stakes worth $145 billion in Apple Inc. (NASDAQ:AAPL), up from 127 in the preceding quarter worth $131 billion.
In its Q1 2021 investor letter, Distillate Capital, an asset management firm, highlighted a few stocks and Apple Inc. (NASDAQ:AAPL) was one of them. Here is what the fund said:
“Apple is an even more notable situation and one that highlights our free cash valuation methodology and bears further discussion given its Q3 ‘20 sale from our strategy. For an extended period, Apple was extraordinarily inexpensive on a free cash flow basis and was the largest position in our strategy, exceeding 5% of the portfolio.”
3. Alibaba Group Holding Limited (NYSE:BABA)
Number of Hedge Fund Holders in Q2: 146
Number of Hedge Fund Holders in Q1: 135
Alibaba Group Holding Limited (NYSE:BABA) is a China-based diversified technology company. It is placed third on our list of 11 best growth stocks to buy according to hedge funds.
On October 1, investment advisory KeyBanc maintained an Overweight rating on Alibaba Group Holding Limited (NYSE:BABA) stock but lowered the price target to $200 from $250. Hans Chung, an analyst at the advisory, issued the ratings update.
Out of the hedge funds being tracked by Insider Monkey, Washington-based investment firm Fisher Asset Management is a leading shareholder in Alibaba Group Holding Limited (NYSE:BABA) with 14 million shares worth more than $3.2 billion.
In its Q1 2021 investor letter, Polen Capital Management, an asset management firm, highlighted a few stocks and Alibaba Group Holding Limited (NYSE:BABA) was one of them. Here is what the fund said:
“Alibaba also detracted from performance as the company continues to remain under regulatory scrutiny from both the Chinese State Administration for Market Regulation on antitrust concerns and the U.S. Securities and Exchange Commission on ADR listing requirements. Despite the regulatory overhang, we believe that Alibaba’s competitive positioning and growth outlook remains intact, even if the company must pay fines or modify some business practices. We viewed the current valuation at <20x next twelve month’s earnings as a compelling opportunity to add to our position. Alibaba is the second largest position in the Portfolio.”
2. Facebook, Inc. (NASDAQ:FB)
Number of Hedge Fund Holders in Q2: 266
Number of Hedge Fund Holders in Q1: 257
Facebook, Inc. (NASDAQ:FB) is ranked second on our list of 11 best growth stocks to buy according to hedge funds. The firm operates as a technology company and is headquartered in California.
On September 30, investment advisory RBC Capital initiated coverage of Facebook, Inc. (NASDAQ:FB) stock with an Outperform rating and a price target of $425, noting that the growth of the firm depended on its deepening relationship with over 3 billion users.
At the end of the second quarter of 2021, 266 hedge funds in the database of Insider Monkey held stakes worth $42 billion in Facebook, Inc. (NASDAQ:FB), up from 257 in the preceding quarter worth $40 billion.
In its Q1 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Facebook, Inc. (NASDAQ:FB) was one of them. Here is what the fund said:
“We continued to keep our learnings from 2020 in mind during the quarter as we sought to increase the up capture of the portfolio. We also made adjustments to the portfolio’s top 10 holdings to increase the participation of select stocks, including Facebook, while trimming our weighting to stable names, which now represent 47% of the portfolio. Our repositioning has been encouraging so far with the portfolio performing better on up days in the market while maintaining good down capture during more turbulent sessions.”
1. Amazon.com, Inc. (NASDAQ:AMZN)
Number of Hedge Fund Holders in Q2: 271
Number of Hedge Fund Holders in Q1: 243
Amazon.com, Inc. (NASDAQ:AMZN) is placed first on our list of 11 best growth stocks to buy according to hedge funds. The firm operates as a diversified technology company and is headquartered in Washington.
On October 5, investment advisory JPMorgan maintained an Overweight rating on Amazon.com, Inc. (NASDAQ:AMZN) stock with a price target of $4,100, noting that the concerns around the firm and price pullbacks made for a “compelling” investment opportunity.
Out of the hedge funds being tracked by Insider Monkey, Chicago-based investment firm Citadel Investment Group is a leading shareholder in Amazon.com, Inc. (NASDAQ:AMZN) with 3.8 million shares worth more than $13 billion.
In its Q1 2021 investor letter, Hayden Capital, an asset management firm, highlighted a few stocks and Amazon.com, Inc. (NASDAQ:AMZN) was one of them. Here is what the fund said:
“Amazon (AMZN):We sold our last remaining stake in Amazon this quarter. Amazon was our longest-running investment holding, after having originally purchasing it at the inception of Hayden in 2014, at a price of ~$317.
I gave some details of how Amazon has progressed over these past 6.5 years in last year’s Q2 2020 letter, which partners can find here (LINK). The company has executed amazingly well over this tenure, with revenues up ~3.3x and since our initial purchase, and reported operating income up ~30x over that period.
Generally, I believe there are three reasons to sell an investment:1) we recognize our initial thesis is wrong (sell out as quick as possible), 2) we have a significantly higher returning opportunity to redeploy the capital into (sell-down to fund the new investment), or 3) the company is maturing and hitting the top part of it’s S-curve / business lifecycle, so the business has fewer places to reinvest its capital internally. As such, the future returns will likely be lower than the past. This investment thus becomes a “source of capital” in the future, as we fund earlier-stage investment opportunities.
In the case of Amazon, we decided to sell due to the third scenario. I’m sure Amazon will continue to generate value for shareholders and continue to keep pace with the broader technology sector. However, I’m just not confident it’s as attractive an investment as when we first invested.
With ~51% of US households having an Amazon Prime account (and with very low churn), each of these households continuing to increase their annual spend with Amazon, and few / no real competitors in sight, Amazon is a dominant force that will only continue to accrue value as consumers continue to move from offline to online purchases for their everyday needs. Likewise, the “cash-flow machine” of Amazon Web Services is in a similar position of strength, with AWS now having ~32% market share and continuing to grow at +30% y/y. Because of this, I think Amazon is probably one of the safest investments in the technology sector today.
So why did we decide to sell the investment then? Simply put, Amazon is …”read the entire letter here]
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Disclosure. None. 11 Best Growth Stocks To Buy According To Hedge Funds is originally published on Insider Monkey.
