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’.