We recently compiled a list of the 10 Most Promising Growth Stocks According to Hedge Funds. In this article, we are going to take a look at where Apple Inc. (NASDAQ:AAPL) stands against the other Most Promising Growth Stock According to Hedge Funds.
Bull Market and Investor Sentiment
Investors had been anxiously anticipating the start of a bull market, which the S&P 500 confirmed earlier this year. The bull run has seen the market continue to rise to new record highs, supporting revenue and earnings growth across the board.
Fast forward, the upward momentum appears to have peaked, with market indices at record highs. While it was highly expected that stocks would explode on the Federal Reserve offering support to a struggling economy with interest rate cuts, that has not been the case.
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It’s become increasingly clear that investors have become more sensitive to growth scares as the global economy faces many issues. Top on the list is the rising geopolitical tensions in the Middle East that threaten to disrupt supply chain networks. Energy prices rising owing to the escalation of a full-blown war could trigger higher inflation, something that is unsettling the markets.
Analysts at UBS are already warning investors that they should get overweight on defensive names as global growth slows at the back of deteriorating fundamentals. While UBS doesn’t anticipate a severe downturn, the bank is cautious, advising its clients to focus on important sectors like utilities and pharmaceuticals, which always outperform in a downturn.
While investors are increasingly rotating into defensive plays amid concerns about geopolitical tensions and the slowing global economy, Morgan Stanley Investment Management’s Andrew Slimmon recommends against this strategy.
“Now is the time to just be cautious. Don’t chase the defensives that are working because I think when we get to the fourth quarter, that won’t work,” the portfolio manager told CNBC’s “The Exchange.
“While our expectation is for October to remain choppy, we don’t view the overall market action to be bearish and encourage investors to maintain perspective on the longer-term trends,” Robert Sluymer, technical strategist at RBC Wealth Management, wrote to clients.
The sentiments echo the need to focus on high-growth companies. Investors who diversify their portfolio into high-growth companies eventually earn great returns regardless of how much a stock rises or falls in the short term.
Analysts project that S&P 500 stocks will grow at a median annual EPS rate of 8.5% over the next five years. On the other hand, the best growth stocks are well poised to outperform this benchmark by a factor of two to three or more.
For starters, companies exposed to artificial intelligence spectacles or those leveraging technology continue to deliver record earnings and revenue growth, thus dominating most hedge fund portfolios. Additionally, the most promising growth stocks, according to hedge funds, are those whose core business would be positively impacted by improving consumer purchasing power. As the Fed steers the economy into a soft landing, consumer purchasing is expected to improve, benefiting consumer cyclical stocks. Moreover, the rate cuts will likely benefit growth and tech stocks as well.
Market fluctuations are inevitable, but the secret to a growth stock’s success lies in the robustness of its core operations. Regardless of whether a stock is rising or falling in the short term, if you consistently invest in a competitively solid business, you’ll eventually reap substantial rewards.
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Our Methodology
To compile the list of the most promising growth stocks according to hedge funds, we sifted through ETFs and online rankings to find 30 popular growth stocks. Then we selected the 10 that were the most widely held by hedge funds, as of Q2 2024. Finally, we ranked the stocks in ascending order of the number of hedge funds that have stakes in them.
At Insider Monkey, we are obsessed with 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).
Apple Inc. (NASDAQ:AAPL)
Number of Hedge Fund Holders: 184
Apple Inc. (NASDAQ:AAPL) is one of the most promising growth stocks, according to hedge funds, as it reduces its reliance on the hardware business. While the company is best known for its iPhone product line, it’s also a key player in cloud computing, offering various services, including game subscriptions and app sales.
The iPhone product line accounted for 52% of Apple’s $296.1 billion revenues for the three quarters that ended in June. Likewise, Apple has moved to reduce its reliance on the iPhone product line by focusing on the service front, which is expected to be a key driver of long-term value.
Consequently, the company has been growing its prospects in advertising, supporting products, cloud service, app store sales, and payments. During the most recent three-month period, services sales increased by 14.1% to $24.2 billion.
Moreover, the service sector boasts of a significantly greater gross margin than hardware, at 74% compared to 35.3% for hardware sales. They also provide a recurring and predictable revenue stream for Apple Inc. (NASDAQ:AAPL), which is exactly what shareholders want.
Even as Apple faces slow hardware sales, it is increasingly investing in artificial intelligence as it seeks to enhance user experience with its devices. New devices are coming with AI-powered software to help summarize text, boost writing skills, and edit photos as Apple seeks to fuel sales.
There is no doubt that Apple trades at a premium as a growth stock with a price-to-earnings multiple of 34.7 compared to an average P/E of 28 for the S&P 500. Apple Inc. (NASDAQ:AAPL)’s premium valuation is expected, given its robust growth on the services front, as it also strengthens its hardware products with AI. Its ability to generate and return value through stock buybacks while offering a 0.44% dividend also underscores why it is a solid long-term growth stock.
Analysts on Wall Street believe Apple is a strong buy with an average price target of $248.90, implying a 9.32% upside potential from current levels. Overall, Apple Inc. (NASDAQ:AAPL) was held by 184 hedge funds in the second quarter of 2024, with total stakes worth $124.18 billion. According to the Insider Monkey database, Berkshire Hathaway is the top shareholder of the company, with a position worth $84.25 billion
Columbia Contrarian Core Fund stated the following regarding Apple Inc. (NASDAQ:AAPL) in its Q2 2024 investor letter:
“Apple Inc. (NASDAQ:AAPL) – Despite the stock falling after announcing earnings in late May, Apple regained ground toward the end of the quarter, fueled by the company’s long-awaited AI announcement at its annual Worldwide Developers Conference (WDC). At the conference, the company showcased some of its new AI features powered by Apple Intelligence that would be coming to Apple products and also announced a partnership with ChatGPT. Investors greatly welcomed the announcement of Apple’s AI strategy and the stock surged, passing Microsoft as the world’s most valuable company (although this hallmark wouldn’t last). Beta testing of these new features will be coming later this summer, but the initial promise and excitement looks to be a potential catalyst for an upgrade cycle, as the company looks to persuade users who have had the same smartphone for years to consider an upgrade.”
Overall AAPL ranks 5th on our list of 10 Most Promising Growth Stocks According to Hedge Funds. While we acknowledge the potential of AAPL as an investment, our conviction lies in the belief that 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 AAPL, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.