Top 10 High Growth Companies Hedge Funds Are Buying

In this article we’re going to go through our list of the 10 high growth companies hedge funds are buying. However, you can skip ahead by clicking on the following link to see the Top 5 High Growth Companies Hedge Funds Are Buying.

But before we get to the stocks, let’s take a deeper look at the definition of growth stocks. Generally speaking, growth stocks are companies whose revenue and earnings are increasing higher than their industry peers’. This can be due to them offering a better product or service than their peers, or because a company has developed an entirely new product or expanded into a new market. There may be many reasons, but the end result is that growth stocks are a great way for investors to pad their portfolio and score better-than-average returns.

There are many ways to identify growth stocks, but usually the search must start at a market overview, in order to identify the industries that are poised to grow. For example, eCommerce has been in trends for years and is likely to remain a dominant industry. Cloud computing, digital payments, online ads, all are examples of markets that are expected to maintain a high growth rate for the foreseeable future.

Once you’ve identified the industries, you can start searching for leading companies by focusing on players with a strong competitive advantage. However, you must also not forget about the risk factor. While growth stocks can generate high and very high capital gains over the long run, they are also not immune to uncertainty and often this uncertainty is much higher compared to value stocks, which are known to be more stable. It’s also useful to keep in mind the overall market sentiment and the state of the economy in order to understand how much share of your portfolio you can allocate to growth stocks, versus value stocks, versus other securities.

If you’re just getting started and are looking for some opportunities among growth stocks to invest in, we can help you at least narrow down your search area. While picking companies for our list of 10 high growth companies hedge funds are buying, we also took into account another metric – hedge fund sentiment. Our research has shown that following hedge funds can be a great way to identify stocks capable of beating the market. Following this strategy, we have been able to identify a list of stocks that beat the S&P 500 ETF (SPY) by more than 124 percentage points since March 2017 (find out more here).

We approached our search for growth stocks, by identifying companies that saw an average annual revenue growth rate of at least 40% over the last five years. However, we also cross-referenced these stocks with our database that keeps track of how many hedge funds are invested in each company and focused on those stocks that saw an increase in popularity during the last three months of 2020. Companies like Microsoft or (NASDAQ:AMZN) didn’t make our list even though their cloud businesses are growing at high rates. We look at the overall growth rates of the entire companies. As a result companies like Tesla (TSLA), Snap Inc. (SNAP), Square Inc. (NASDAQ:SQ), and Shopify (SHOP) made our list.

Without any further ado, let’s take a look at 10 high growth companies hedge funds are buying.

10. Roku Inc (NASDAQ:ROKU)

Our top 10 growth stocks to buy list starts with Roku Inc (NASDAQ:ROKU), in which there were 60 investors with long positions at the end of 2020, up by one over the quarter. Even though the nr of bullish investors increased only incrementally, the aggregate value of their holdings more than tripled to $3.24 billion. Roku has recently entered into a strategic alliance with Nielsen Holdings (NYSE:NLSN), under the terms of which Roku will acquire Nielsen’s Advanced Video Advertising business. Roku, a provider of hardware digital medial player for streaming, will be able to integrate dynamic ad insertion into its platform and publishers will be able to implement Nielsen’s Digital Content Ratings. The transaction is expected to close in the second quarter of 2021. Most analysts have viewed the deal positively, with KeyBanc, JP Morgan, and Susquehanna expressing a bullish opinion on the deal.

Among the investors tracked by Insider Monkey, the top shareholder of Roku is Cathie Wood’s ARK Investment Management, which owns a $1.79 billion position, the second largest in its portfolio. Moreover, GDS Investments, in their fourth-quarter investor letter said that they “have great confidence in Roku, Inc. (NASDAQ:ROKU). “As a “cord-cutting” beneficiary, Roku, Inc. recently reported huge revenue (up 73% year-over-year) and, having added 2.9M active accounts in the last quarter, now stands at 46M,” GDS said.

9. Okta Inc (NASDAQ:OKTA)

Then there’s Okta Inc (NASDAQ:OKTA), in which 61 funds tracked by Insider Monkey disclosed holding shares, an increase of 10 over the quarter. Among these funds, a new joiner is Robert Pitts’ Steadfast Capital, which acquired a $155.06 million position in the last three months of 2020. Okta, an identity and access management company, has seen its stock climb by more than 122% in the last 52 weeks, as the company has been substantially beating expectations on the back of increase in popularity of cloud-based applications. However, recently the stock took a hit following the announcement of acquisition of rival company Auth0 in an all-stock deal worth $6.5 billion, considering it too expensive. However, Okta Inc (NASDAQ:OKTA)’s CEO Todd McKinnon defended the deal, appearing on CNBS’s “Mad Money”, saying that Auth0 was valued as a company on path towards an IPO and that they “paid a multiple on revenue that’s slightly below ours, but in the same ballpark.”

8. Coupa Software Inc (NASDAQ:COUP)

Another stock that made our list of 10 high growth companies hedge funds are buying is Coupa Software Inc (NASDAQ:COUP), whose shares have surged by 153% in the last year. As the stock has recently declined slightly, amid an overall tech sell-off, Coupa has been pointed out by Goldman Sachs alongside Microsoft Corporation (NASDAQ:MSFT) and, inc. (NASDAQ:CRM) as new joiners on their Conviction Buy List. Goldman said Coupa will continue to enjoy strong growth in 2021 and overall, the company benefits from a large market and high barriers to entry, among other things. Coupa Software, a provider of a business spending management platform, has recently reported its fourth-quarter results, surprising the Street with a profit (adjusted for one-time items) of $0.38 per share, versus expected loss of $0.11 per share and the company’s guidance for a loss between $0.18 and $0.21. The company also posted a revenue of $163.5 million, up by 47% on the year.

Coupa Software Inc (NASDAQ:COUP) saw 62 funds in our database disclosing long positions as of the end of December, up by 12 compared to the end of September. At the same time, the total value of their holdings surged to $4.13 billion, representing nearly 17% of the company, from $3.19 billion. Here is what Artisan Mid Cap Fund has to say about Coupa Software Incorporated in their Q4 2020 investor letter:

“We started new investment campaigns in Coupa Software. Coupa is a leading provider of cloud-based business spend-management software. The company helps 1,400 customers process over $2 trillion in annual spend across more than 5 million suppliers. While this quarter’s announcement of a major new customer win at Walmart shows it still has a long runway for growth in this business, we are particularly excited about Coupa Pay—a recently introduced set of cloud services that seeks to process B2B payments (not just invoices) across its large network. B2B payments has seen far less innovation in recent years compared to B2C (PayPal, Venmo, Square), but we see it as a major opportunity in the years ahead.”

7. Snap Inc (NYSE:SNAP)

SNAP ranks 7th on our list of the top 10 growth companies to buy. In Snap Inc (NYSE:SNAP), 63 investors tracked by Insider Monkey disclosed ownership of $4.61 billion worth of stock, an increase from 51 funds and $1.17 billion, respectively, a quarter earlier. Among the new investors in Snap are Lone Pine Capital, led by Stephen Mandel, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, and Jim Simons’ Renaissance Technologies.

Provider of multimedia messaging app Snap Inc (NYSE:SNAP) has also made the ranking as the company has been delivering impressive revenue growth, even though it has still some ground to cover to become profitable, which is likely to happen quite soon. At its latest investor day several weeks ago, Snap said that it’s on track to deliver revenue growth of over 50% for the foreseeable future as its has built its self-serve ad platform. For the fourth quarter, Snap reported revenue of $911.32 million, up by 63% on the year, while its net loss narrowed to $0.08 per share from $0.17 per share a year earlier. Here is what Baron Opportunity Fund said about SNAP in its 2020 Q4 investor letter:

“Snap Inc. is the leading social network among teens and young adults in the U.S. Shares of Snap were up this quarter on excellent financial results, including revenue growth that benefited from a recovery in ad spending and evidence of impressive operating leverage. We continue to view Snap favorably as the company sustains its rapid pace of product innovation and expands its ecosystem through premium partnerships and increased developer accessibility, helped by its unique audience reach, powerful video business, improved ad products, and robust augmented and virtual reality technology.”

6. Carvana Co (NYSE:CVNA)

CVNA ranks 6th on our list of the top 10 growth stocks. Carvana Co (NYSE:CVNA) has seen strong growth with its share price surging by 631% in the last year. The eCommerce company, which focuses on cars and is known for providing fully-automated car vending machines across the US, reported a revenue of $1.83 billion for the last quarter, up by 67% on the year, driven by a 43% growth in the number of sold vehicles to 72,172 units. At the same time, Carvana Co (NYSE:CVNA)’s net loss of $0.41 per share was much lower than $0.79 per share reported a year earlier and better than the expected loss of $0.48 that analysts had predicted.

Among the investors in our database, Carvana Co (NYSE:CVNA) was included in portfolios of 63 funds at the end of 2020, up by 10 over the quarter, while the aggregate value of their holdings surged by more than $1.0 billion to $7.07 billion, which amounts to more than 17% of the company. Here is what ShawSpring Partners has to say about Carvana Co. in their 2020 Q4 investor letter:

“We made the decision to exit our investment in Carvana. Over our two-year holding period, we generated an internal rate of return of 114%. Our exit decision is unrelated to a change in our assessment of Carvana’s business quality, long-term opportunity, or management team. Instead, our rationale was based on our internal estimate of Carvana’s valuation, and our forecast for prospective returns. We continue to believe in the strength of Carvana’s vertically-integrated business model, and the superior customer proposition Carvana provides to used-car buyers. While we have no doubts that Carvana will remain a great business, we believe that at Carvana’s current valuation, it makes sense to shift our attention towards other equally fantastic businesses which have long growth runways less appreciated by the market. We will continue to follow the company’s progress closely and expect to take advantage of any dislocations that may cause Carvana’s expected return to meet our high hurdle rate for re-investment.”

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Disclosure: No positions. Top 10 High Growth Stocks Hedge Funds Are Buying is originally published at Insider Monkey.