We recently compiled a list of 10 Best Young Stocks To Buy Now. In this article, we will look at where Reddit Inc. (NYSE:RDDT) ranks among the best young stocks to buy now.
Market Uncertainty to Remain Until Elections
A broader market trend observed ever since the Fed announced its September cut rate has been the volatility in the performance of small-caps. However, despite the continuous positive momentum, small-caps have not kept pace with more speculative assets, which experienced significant growth. This trend raises questions about potential implications for monetary policy and its impact on productive economic activities.
Smaller companies often benefit during periods of profit recovery, particularly when accompanied by supportive monetary policies. The prevailing trend among investors, however, still favors larger companies, even as mega-cap stocks exhibit slower growth and higher valuations compared to their smaller counterparts. Analysts maintain their stance on a balanced approach when it comes to investing in mega-caps, or even small-caps, setting the stage for a closer look at top-performing investments in the current year.
However, Stephanie Link, Chief Investment Strategist and Portfolio Manager at Hightower, recently expressed confidence in a soft landing for the economy despite market volatility, joining CNBC on September 21. This highlights a contrasting perspective amidst market volatility and uncertainty. While there are concerns regarding the performance of small-cap stocks and their ability to keep pace with larger, more speculative assets, Link’s optimism suggests that the economy may stabilize without entering a recession, again encouraging a balanced approach to investing.
Link highlighted the importance of confidence. She believes that the Fed is skillfully guiding the economy towards a soft landing, even amidst the expected market fluctuations before the elections.
Just 3 weeks ago, the S&P 500 had dropped by 4%. Still, it rebounded by 4% the following week. It rose another 1% last week, reaching new highs, and expressed optimism about buying opportunities during any market weakness, citing better-than-expected economic growth driven by recent data, including improved retail sales and manufacturing figures, as well as a decline in weekly jobless claims to a 4-month low. This positive economic backdrop supports an estimated growth rate of 2.9%, which is expected to benefit corporate earnings.
The tech sector has recently outperformed others. Link noted a broadening market trend over the past couple of months, indicating that while tech has taken the lead, other sectors such as financials, industrials, materials, and discretionary stocks are also showing strength. She advised investors to remain selective in their choices amidst ongoing volatility.
When discussing specific investment picks, Link highlighted ExxonMobil as a key choice. Despite projections indicating a 64% year-over-year decline in earnings for refining and marketing companies in Q3 and an 11% drop in production, Link believes this company is extremely cheap at a price-to-earnings ratio of approximately 13 times its estimate. She expects it to triple its production in exploration and production (E&P) and aims for organic growth of 10% between now and 2027. Upcoming catalysts include an analyst meeting scheduled for December 11th and several projects that are expected to generate $4 billion in earnings.
While touching on geopolitical factors affecting oil prices, particularly regarding the Middle East, Link suggested that much of this has already been factored into oil market prices and expressed confidence that the American oil and gas corporation would remain profitable even at lower oil prices, generating substantial profits at $30 per barrel and significantly higher returns at $70 per barrel through dividends and share buybacks.
When asked about the Department of Energy’s plans to refill the petroleum reserve at prices below $70 per barrel, Link dismissed this as irrelevant noise. Instead, she emphasized focusing on where companies are generating profits overall rather than getting distracted by short-term fluctuations.
The interplay between economic indicators, sector performance, and geopolitical factors continues to shape investment strategies as stakeholders prepare for future developments, especially as we see that stock performance can still not be accurately measured. On September 26, Tom Lee, Fundstrat Global Advisors managing partner and head of research, joined CNBC’s ‘Closing Bell’ to address the current state of the stock market following the Fed’s recent interest rate cuts.
Since the Fed implemented a significant rate reduction, the market has seen limited movement, with notable activity only occurring last Thursday. Tom Lee explained that the Fed’s actions have initiated an easing cycle, which historically tends to yield positive outcomes for the market 3-6 months down the line. However, he cautioned that stock performance in the immediate future remains uncertain due to ongoing repositioning ahead of the upcoming election in 40 days.
The conversation further explored whether the impending election would disrupt a favorable scenario for stocks to benefit from a post-Fed rally. Lee suggested that while this situation might delay market gains, it is not entirely negative. He noted that many wealth managers and family offices are hesitant to commit capital until after Election Day, preferring to wait until that event is behind them. He expressed optimism about a potential surge in stock prices following the election, stating that November and December typically see strong rallies in election years, especially when markets have already gained more than 10% in the first half of the year.
When discussing investor sentiment regarding the economy and the Fed’s capabilities, Lee indicated that so far, things look promising. He highlighted an upcoming Core Personal Consumption Expenditures (PCE) report expected on Friday, which could confirm that inflation is no longer a pressing concern. However, he noted a significant number of investors believe we may already be in a recession. For investor sentiment to shift back toward a soft landing perspective, evidence must exceed expectations.
Regarding a comment on recent target adjustments for the S&P 500, mentioning Brian Belski’s increase of his target to the highest on Wall Street, Lee acknowledged the potential upside in the next 3-6 months, expressing skepticism about setting aggressive targets like 6,000 for the S&P 500 at this time due to current valuations not being particularly low and having already experienced significant gains. He conveyed confidence in longer-term prospects but indicated caution regarding immediate investments.
As for small-cap stocks represented by the Russell 2000 index, Lee acknowledged some profit-taking after a strong week but maintained that such fluctuations are typical during bottoming phases. He drew parallels to previous market recoveries, such as energy stocks in 2021, suggesting that while current movements may feel erratic, they signal a multi-year growth opportunity for small caps.
The discussion also addressed concerns regarding overcrowded sectors within the market. Some analysts have noted that various sectors like industrials and utilities have reached or are trading near highs, prompting some investors to seek better value in bonds instead. However, Lee argued that equities offer inflation protection and capital appreciation potential that bonds typically do not provide. He emphasized that there are still numerous attractive opportunities within equities.
As the stock market is expected to remain volatile, primarily due to the upcoming elections on top of economic uncertainty, there is potential for growth in the coming months and investors should exercise caution and carefully consider their investment strategies. Such a fluctuating market also opens up opportunities to take bigger risks and diversify your portfolios.
Methodology
We used stock screeners to look for companies that went public recently in the past 2 years, with a preference for latest IPOs. We then selected the 10 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024.
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).
Reddit Inc. (NYSE:RDDT)
Market Cap as of September 26: $11.26 billion
Number of Hedge Fund Holders: 39
Reddit Inc. (NYSE:RDDT) is a social news aggregation, content rating, and forum social network. Registered users submit content to the site such as links, text posts, images, and videos, which are then voted up or down by other members, and are organized by subject into user-created boards called subreddits. It’s known for its user-generated content, viral trends, and active online communities.
The company grew both its users and revenue by about 50% year-over-year in Q2 2024. This revenue equated to $281.18 million. Improvements are being made to make this platform faster, safer, and easier to use. One recent improvement led to a 10% sequential increase in comments viewed.
International expansion remains a top priority. Of the massive user base of ~342 million active users and ~91 million daily active users, 50% of the current users are based outside of the US, with France, India, the UK, and the Philippines taking the lead. International daily active users exceeded 45 million, growing 44% year-over-year and 11% sequentially in Q2.
It recently launched a developer platform to the public beta. Users are creating custom posts like scoreboards and stock tickers, and the company is working on allowing them to earn money from their creations.
The company plans on improving its search results with AI to provide better recommendations and help users discover new content in the remaining part of 2024. It’s also exploring partnerships with search engines like Google and OpenAI to make Reddit Inc. (NYSE:RDDT) more easily searchable.
Reddit Inc. (NYSE:RDDT) presents a promising investment opportunity. Its unique platform, featuring community-driven content and diverse demographics, attracts advertisers seeking to reach specific audiences. The focus on expanding revenue beyond traditional ads, through initiatives like Reddit Premium and innovative advertising formats, positions it for growth.
Overall RDDT ranks 1oth on our list of the best young stocks to buy now. While we acknowledge the growth potential of RDDT, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than RDDT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published on Insider Monkey.