In this article we present the list of 10 Small-Cap Growth Stocks Hedge Funds Love.
Madison Square Garden Sports Corp. (NYSE:MSGS), Boyd Gaming Corporation (NYSE:BYD), and Chegg, Inc. (NYSE:CHGG) are a few of the small-cap growth stocks that the hedge fund industry is bullish on.
It’s been a rough year for growth stocks to say the least. As recession fears continued to mount (and have since become realized), investors sought safer havens for their money, shifting their portfolios from growth to value.
The long-term impact of rate hikes has also dented the appetite for growth stocks, heavily looming over their future earnings potential, which in many cases is all these stocks have going for them in the present. Yet while growth stocks tend to get dinged more heavily during rate hikes, there have been recent exceptions.
During the latest rate hike period from December 2016 through December 2018, growth stocks actually did quite well, as evidenced by the performance of Cathie Wood’s ARK Innovation ETF, which soared by 90% during that period.
The only difference now is the added layer of economic concerns, which has led to a perfect storm that has battered growth stocks. The Russell 1000 Growth index is down by nearly 20% year-to-date, while the Russell 1000 Value index is down by just 8% this year, easily outperforming the market.
With the valuations of many growth stocks sliding into more attractive territory, we are starting to see a rebound for the index, which is up by about 15% since the middle of June. There are also some potential glimmers of hope that could propel stocks higher in the second half of 2022 and beyond, including China reopening and inflation being beaten down.
History is also on the market’s side, as it’s traditionally suffered early-year losses following a blowout year (which we had in 2021), but then retraced those losses by the end of the year. While the market will have a tougher time getting all the way back this year given the ongoing economic and political concerns, it wouldn’t be surprising to see a moderate rebound continue.
All of which should be good for growth stocks, which have taken the brunt of the damage this year, and therefore stand to benefit the most should the market retrace. With that in mind, let’s take a look at ten small-cap growth stocks that hedge funds love as of March 31, even in the midst of the growth stock selloff.
Our Methodology
The following data is gathered from the Q1 13F filings with the SEC made by the 900+ hedge funds that we track as part of our various investment strategies. We follow hedge funds in this manner because Insider Monkey’s research has uncovered that their consensus stock picks can deliver outstanding returns.
10 Small-Cap Growth Stocks Hedge Funds Love
10. Fastly, Inc. (NYSE:FSLY)
Number of Hedge Fund Shareholders: 30
Madison Square Garden Sports Corp. (NYSE:MSGS), Boyd Gaming Corporation (NYSE:BYD), and Chegg, Inc. (NYSE:CHGG) rank near the top of the list of small-cap growth stocks hedge funds love. Also ranking highly is Fastly, Inc. (NYSE:FSLY), which has seen a 76% spike in hedge fund ownership over the previous two quarters. Jim Simons’ Renaissance Technologies built a new FSLY stake of nearly 1.23 million shares in Q1.
Fastly, Inc. (NYSE:FSLY) was able to raise its full-year revenue guidance by $10 million after a strong second quarter during which sales of $102.5 million exceeded the top of the company’s guidance range. However, compressing margins sent the stock into a tailspin, as the content delivery network operator’s $0.23 EPS loss missed estimates. Gross margin has contracted by 15 percentage points from 2020 levels.
Fastly, Inc. (NYSE:FSLY)’s margins are expected to improve in the second half of this year, and the stock is considerably cheaper now than just two years ago, trading at a P/S of just 4.17x and price to book of 1.64x, figures that stood at 35x and 18.5x just two years ago.
9. Kura Oncology, Inc. (NASDAQ:KURA)
Number of Hedge Fund Shareholders: 30
Kura Oncology, Inc. (NASDAQ:KURA) still ranks highly among hedge funds, but ownership of the stock has fallen by 32% since the end of 2020, at which time it would’ve ranked second on this list. Oleg Nodelman’s EcoR1 Capital is KURA’s largest shareholder among the funds that are tracked by our database, owning 6.64 million shares on March 31.
A clinical stage biopharmaceutical company, Kura Oncology, Inc. (NASDAQ:KURA) is developing small molecule candidates to treat various forms of cancer by directly targeting the specific triggers that lead to the progression of those cancers. Its current product candidates include treatments for patients with pancreatic cancer, colorectal cancer, blood cancers, and non-small cell lung cancer.
With $450.3 million in cash and equivalents as of June 30, Kura Oncology, Inc. (NASDAQ:KURA) expects to be able to fund its operations through the end of 2024. Cantor Fitzgerald analyst Li Watsek has a $30 price target and ‘Overweight’ rating on KURA shares. The analyst believes the market is discounting the potential combination opportunities for Kura’s lead candidate tipifarnib.
8. Mr. Cooper Group Inc. (NASDAQ:COOP)
Number of Hedge Fund Shareholders: 31
Mr. Cooper Group Inc. (NASDAQ:COOP) hit an all-time high in hedge fund ownership in the fourth quarter of 2021 before a 21% slide in Q1. Ric Dillon’s Diamond Hill Capital owns the second-largest COOP stake among the funds tracked by our database, and discussed the company in its Q1 investor letter, linked to below.
Home loan servicer Mr. Cooper Group Inc. (NASDAQ:COOP) is among the rare group of stocks that are in positive territory this year, having gained nearly 5% year-to-date. Mr. Cooper Group blew away estimates in Q2, earning $2.03 per share on revenue of $599 million. BTIG analyst Eric Hagen has a ‘Neutral’ rating on the stock, saying in April that despite the risk of a recession, Mr. Cooper Group is worth about 1x book value thanks to its scale and liquidity. COOP shares currently trade at 0.79x book value.
Here is what the Diamond Hill All Cap Select Fund had to say about Mr. Cooper Group Inc. (NASDAQ:COOP) in its Q1 2022 investor letter:
“Other top contributors included mortgage servicing company Mr. Cooper Group (NASDAQ:COOP). Mr. Cooper Group continues to perform well fundamentally, even with the prospects of a challenging mortgage originations market. Its balanced business model between origination and servicing should position the company well in the quarters ahead.”
7. Planet Fitness Inc (NYSE:PLNT)
Number of Hedge Fund Shareholders: 33
Planet Fitness Inc (NYSE:PLNT) shares were battered throughout the early months of the pandemic, but have rebounded nicely in the past year, rewarding the many hedge funds who stuck with the company through a period of shuttered gyms and the resulting boom in home workout equipment. Karthik Sarma’s SRS Investment Management is the most bullish PLNT investor in our database, owning 6.96 million shares, with the stock ranking as its second favorite.
There’s no denying the solid growth trajectory that Planet Fitness Inc (NYSE:PLNT) is on, though the stock is likely still too expensive for some tastes. The fitness center operator and franchisor expects to grow sales by 50% this year, alongside an 80% surge in EPS. That growth is pretty solid for a company trading at just 10x sales, but less so for one trading at 129x earnings.
Planet Fitness Inc (NYSE:PLNT) did have impressive execution before the pandemic upended things, building a streak of 53 consecutive quarters of comps growth. The company also expects to begin opening new locations at a similar rate as pre-pandemic, which includes the company recently signing a deal for locations in New Zealand.
6. Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY)
Number of Hedge Fund Shareholders: 36
Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) is another small-cap growth stock that cratered in the early months of the pandemic, though it fully rebounded within a year. Hedge fund ownership of PLAY jumped by 29% during Q1, hitting an all-time high for the stock. Greg Eisner’s Engineers Gate Manager was among the funds to take a new stake in Dave & Buster’s during Q1.
Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) has enjoyed a strong year as people are seemingly clamoring for a return to in-person entertainment. However, with macro pressures now increasing, its comps growth appears to be slowing considerably, down to 7.5% during the five weeks ending near the end of June, down from 12.5% during the five weeks prior to that.
While hedge funds grew a lot more bullish on Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) during Q1, it still couldn’t match their conviction in Madison Square Garden Sports Corp. (NYSE:MSGS), Boyd Gaming Corporation (NYSE:BYD), or Chegg, Inc. (NYSE:CHGG). We’ll check out those and other stocks in the second part of this article.
5. Penn National Gaming, Inc. (NASDAQ:PENN)
Number of Hedge Fund Shareholders: 37
Kicking off the second part of this list is Penn National Gaming, Inc. (NASDAQ:PENN), in which hedge fund ownership more than doubled between Q1 and Q3 of 2020. Ownership of the stock has since dipped by 20% as more investors grow concerned about the losses in its digital business. Jim Simons’ Renaissance Technologies owns 1.79 million PENN shares as of March 31.
Penn National Gaming, Inc. (NASDAQ:PENN) has a large footprint across the North American gambling landscape, owning 44 casinos, in addition to running online sports betting operations in 13 states and online casino operations in five. Industry-wide gaming revenue growth slowed considerably in June, as revenue reported by casinos, racetracks, and their partners grew by 2.2% year-over-year to $401.5 million during the month. Through June, the year-to-date growth rate stands at a much more impressive 15.2%. PENN shares trade at the most reasonable levels they have in some time, including at just 1.55x book value and 1.05x sales, their lowest levels since 2019.
The Baron Focused Growth Fund had this to say about Penn National Gaming, Inc. (NASDAQ:PENN)’s poor Q1 performance on the stock market in its Q1 2022 investor letter:
“Penn declined 18.2% in the quarter and penalized performance by 54 basis points. This was due to investor concerns over continuing losses from its Barstool business. We believe the $50 million of losses this year from its digital business is modest in relation to Penn’s $1 billion of brick and mortar EBITDA. The losses from its digital business represent customer acquisition costs incurred as additional states legalize online gambling. Since it is far less expensive to retain existing customers than to acquire new ones, we expect marketing costs to decline as Penn builds its customer base. Penn’s core bricks and mortar casino business remains strong, and the company has a healthy regional casino business and a strong balance sheet to fund digital losses.”
4. Chegg, Inc. (NYSE:CHGG)
Number of Hedge Fund Shareholders: 40
Chegg, Inc. (NYSE:CHGG) ranks fourth on the list of small-cap growth stocks hedge funds like, though that could change once the Q2 data is available, as the only two funds that have filed on CHGG so far both sold out of their positions. Nonetheless, Chegg has the support of several major hedge funds, including Fir Tree, founded by Jeffrey Tannenbaum, and John Overdeck and David Siegel’s Two Sigma Advisors.
It was reported in May that Byju’s was considering the acquisition of either Chegg, Inc. (NYSE:CHGG) or 2U, Inc. (NASDAQ:TWOU), with the company reportedly in talks to buy the former. The market wasn’t overly enthused about the prospect, perhaps given that Byju’s had secured just $2.4 billion in financing for a deal, while CHGG was already valued at $2.2 billion. It now appears that Byju’s has pivoted to 2U, which makes more sense given that company’s smaller size.
The Artisan Mid Cap Fund believes Chegg, Inc. (NYSE:CHGG)’s U.S penetration has become relatively mature, which bolsters the need for strong international expansion for the stock to do well going forward. It had this to say about CHGG in its Q4 2021 investor letter:
“Short-term market dynamics aside, we did experience several disappointing profit cycle developments during the quarter, Chegg and Roku in particular. Chegg is a digital education platform. A pattern of steady long-term growth in US subscribers surprisingly came to an end when it reported Q3 results. This precipitated a sharp decline in the company’s valuation and our estimate of its private market value (PMV). Management cited factors such as fewer enrollees in 2-year colleges (lured into the workforce by higher wages) and less need for study aides as COVID-related pressures have resulted in students taking less-challenging courses and professors assigning lighter workloads. We view these explanations as mostly logical, but we also believe US penetration of the company’s services has become relatively mature. These headwinds could persist for at least the next few quarters, and we are currently evaluating whether other long-term growth drivers—international subscriber growth, new services—remain intact. Meanwhile, it represents a very small GardenSM position in our portfolio.”
3. Boyd Gaming Corporation (NYSE:BYD)
Number of Hedge Fund Shareholders: 40
Boyd Gaming Corporation (NYSE:BYD) is another small-cap gambling-related stock that hedge funds love. Ownership of BYD has skyrocketed by 74% since the first quarter of 2021, with Lee Ainslie’s Maverick Capital and Robert Hockett’s Covalent Capital Partners being among the company’s new shareholders.
Boyd Gaming Corporation (NYSE:BYD)’s Q2 revenue was flat year-over-year at $894 million, which beat estimates, being up against challenging comps from a year ago, when government stimulus checks provided a sales boost. Boyd’s margins improved to 39.6% during the quarter, the fifth straight quarter of 39% margins for the gaming company. The company’s strong Q2 trends appear to have persisted into July according to Barclays analyst Brandt Montour, who has an ‘Overweight’ rating and $65 price target on the stock.
The Baron Real Estate Fund likes Boyd Gaming Corporation (NYSE:BYD)’s attractive valuation and potential as a takeover target, having this to say about the company in its Q1 2022 investor letter:
“Following strong share price performance in 2021, the shares of Boyd Gaming Corporation continued to perform well in the first quarter of 2022. Boyd is one of the largest and most successful casino entertainment companies in the U.S. The company owns and operates 28 casino gaming properties in 10 states with a large presence in Las Vegas and a geographic focus on the drive-to, leisure gaming customer. We remain optimistic about the prospects for Boyd’s shares because business conditions are strong, management maintains a liquid and conservatively capitalized balance sheet, insiders own approximately 27% of the company, the shares remain attractively valued at only 7.5 times 2022 estimated cash flow and a double-digit free cash flow yield, and we believe the company could be an attractive acquisition candidate should its current valuation remain discounted relative to recent private market casino and gaming transactions.”
2. Madison Square Garden Sports Corp. (NYSE:MSGS)
Number of Hedge Fund Shareholders: 40
Hedge fund ownership of Madison Square Garden Sports Corp. (NYSE:MSGS) has gradually trended down over the past three years after peaking at 59 in the first quarter of 2019. It nonetheless ranks second on this list, with John Rogers’ Ariel Investments and Mason Hawkins’ Southeastern Asset Management ranking as some of its most bullish shareholders.
Madison Square Garden Sports Corp. (NYSE:MSGS)’s fiscal Q3 revenue topped estimates at $337.8 million, but earnings widely missed estimates for the second straight quarter, coming in at $1.00. Wolfe Research analyst Peter Supino expects intense competition for customers will drive up acquisition costs and put further pressure on MSGS’s bottom line. He has an ‘Outperform’ rating and $231 price target on the stock.
The aforementioned Ariel Investments published its Ariel Fund & Ariel Appreciation Fund Q3 2021 investor letter last year, in which it had this to say about what makes Madison Square Garden Sports Corp. (NYSE:MSGS) such an attractive proposition:
“In Ariel Fund and Ariel Appreciation Fund, we re-initiated a position in Madison Square Garden Sports Corp (MSGS). As the owner of two storied sports franchises in the biggest U.S. market—the New York Knicks (NBA) and Rangers (NHL)—we believe the company’s scarce and valuable content should continue to grow and command a premium as the economic reopening continues.”
1. Coupa Software Incorporated (NASDAQ:COUP)
Number of Hedge Fund Shareholders: 46
Hedge fund ownership of Coupa Software Incorporated (NASDAQ:COUP) fell by 22% in the first quarter, which wasn’t enough to stop the company from topping our list of small-cap growth stocks that hedge funds love. Stanley Druckenmiller and Steve Cohen were among the prominent hedge fund managers to unload COUP from their portfolios during Q1.
Coupa Software Incorporated (NASDAQ:COUP)’s cloud-based business spend management platform utilizes AI to analyze and help inform company’s invoicing, supply chain, and other decisions. Demand for the company’s software continues to be robust given the ongoing supply chain challenges facing many companies.
The Aristotle Large Cap Growth Fund explained why it, and possibly other hedge funds, decided to sell off Coupa Software Incorporated (NASDAQ:COUP) during Q1, having this to say about the company in its Q1 2022 investor letter:
“We sold our position in Coupa Software following the company’s fourth quarter 2021 earnings results. The company reported earnings that were disappointing relative to the growth trajectory of both pre-COVID and prior quarters over the past fiscal year. We are concerned that the company is seeing slowing traction in the enterprise sector and felt that the weak topline and billings guidance along with margin compression from increased sales and marketing costs creates too many headwinds for us to be comfortable with. The weak fiscal year 2023 billings guidance when combined with management’s qualitative comments about a strong pipeline is concerning to us, and we believe management has done a disappointing job in providing more transparency around the growth drivers for the business.”
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Disclosure: None. 10 Small-Cap Growth Stocks Hedge Funds Love is originally published at Insider Monkey.
