We recently compiled the list of the 10 Best Fast Growth Stocks To Buy according to the hedge funds using the latest sentiment data. In this article, we are going to take a look at where Duolingo, Inc. (NASDAQ:DUOL) is also considered an undervalued growth stock according to hedge funds. Recently Clearbridge said the following about Duolingo Inc.:

“Duolingo, Inc. (NASDAQ:DUOL), in the consumer discretionary sector, is a category leader in online language learning. With a freemium digital education model offering 40+ languages, Duolingo’s application has exhibited rapid growth in users and conversion to paid subscribers. The company has opportunity to expand its English-learning focus as well as broaden into new categories like math and music. Duolingo offers a long history of product innovation, marketing efficiency and attractive profitability/unit economics.”

Growth stocks are those that are either growing their revenue in mid to high double or triple digit percentages or those who trade at significantly higher prices when compared to their earnings. Using a high P/E ratio is the more commonly accepted definition of growth stocks, and sometimes, investors are richly rewarded for their faith.

While we’ll get to the specifics later, there are several stock indexes and exchange traded funds that track growth stocks. Some of the more popular growth stock indexes and ETFs are Vanguard Growth Index Fund Admiral Shares (VIGAX) ETF and the S&P 500 Pure Growth stock index. The performance of these ETFs and indexes depends, for most part, on the economic climate. A well known investment principle is that growth stocks perform well when interest rates are low and consumers and businesses are able to comfortably splurge for pricey products and services.

Year to date, the Vanguard Growth Index Fund Admiral Shares (VIGAX) and the S&P 500 Pure Growth index are up by 15% and 12%, respectively. This allows the S&P stock index to match the benchmark index in performance, while the Vanguard Fund has gained more since the S&P is up by roughly 12% year to date.

Over the past twelve months, a period characterized by high but stable interest rates, easing inflation, robust economic growth, and the AI boom, the S&P 500 has gained 27.7%. The index bottomed in October 2023 and so did our ETF and index. The Vanguard ETF is up by 34.9% over the year, and the S&P Pure Growth index has lagged the broader index through its 24% gains. Compare these all around rosy figures with the 32% that the index lost between January 2022 and June 2022 and the additional 32% bled by the ETF and you’ll see how growth stocks are sensitive to high rates and inflation.

Therefore, trying to see where interest rates are heading would also serve one well when talking about fast growth stocks. On this front, one ‘proxy’ that can be used to gauge investor sentiment is the Russel 2000 index. This is a small cap stock index, and if investors become optimistic about lighter rates, then the shares rise since smaller firms are often more at risk from higher rates than corporate titans.

Small-cap stock indices have been relatively flat year to date by having registered an unimpressive 2% in gains. This is unsurprising as the year has seen Wall Street progressively tone down rate cut expectations. However, from mid April to late May, the small caps have gained 6%, so perhaps the winds are changing for interest rates.

Our Methodology

To make our list of the best fast growth stocks, we first narrowed down the 20 stocks that had the highest trailing P/E ratios and five year and quarter over quarter revenue growth greater than 30%. These were ranked through the number of hedge funds that had bought the shares in Q1 2024 according to Insider Monkey’s data of hedge fund holdings. Moreover, for each of these stocks, we looked at how many hedge funds from our database held shares according to the last round of 13F filings. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Duolingo, Inc. (NASDAQ:DUOL)

Number of Hedge Fund Investors In Q1 2024: 43

TTM P/E Ratio: 182

Language software developer Duolingo, Inc. (NASDAQ:DUOL) rose to prominence during the coronavirus pandemic when it provided convenient global remote language assessment options for educational and professional needs. The virus era also led to Duolingo, Inc. (NASDAQ:DUOL)’s IPO, and since its listing in 2021, the stock has gained 27% in price appreciation.

Insider Monkey’s database of hedge fund filings covering Q1 2024 shows that 43 funds have bought a stake in Duolingo, Inc. (NASDAQ:DUOL). Hellen Ellenbogen’s Durable Capital Partners owns one of the most valuable stakes that is worth $684 million.

Duolingo, Inc. (NASDAQ:DUOL) ranks 10th on our list of the best high growth stocks. Click to see the 10 Best Fast Growth Stocks To Buy Now. While we acknowledge the potential of language companies, our conviction lies in the belief that Duolingo’s business may be disrupted by an AI company and AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NVIDIA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: Michael Burry Is Selling These Stocks and Jim Cramer is Recommending These Stocks.

Disclosure: None. This article is originally published at Insider Monkey.