In this article we present the list of 10 Small-Cap Growth Stocks Hedge Funds Love. Click to skip ahead and see the 5 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.
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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.
Click to continue reading and see the 5 Small-Cap Growth Stocks Hedge Funds Love.
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Disclosure: None. 10 Small-Cap Growth Stocks Hedge Funds Love is originally published at Insider Monkey.