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 Meta Platforms Inc (NASDAQ:META) 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.
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).
Meta Platforms Inc (NASDAQ:META)
Number of Hedge Fund Holders: 219
Meta Platforms, Inc. (NASDAQ:META) is arguably the most promising growth stock, according to hedge funds, for diversifying an investment portfolio in the social media space. As the top social media company, Meta has cemented its position in the lucrative advertising business. It also leverages artificial intelligence to strengthen its competitive edge and enhance user experience.
As of June, Meta Platforms, Inc. (NASDAQ:META) commanded over 3.3 billion active users across its suite of applications, Facebook, Instagram, WhatsApp, Messenger, and Threads. The massive target market has made Meta the go-to for advertising campaigns, allowing the company to strengthen its advertising empire.
Meta Platforms, Inc. (NASDAQ:META) stands out in advertising services as it enables advertisers to reach specific audiences by considering their age, interests, and geographical location. This highly effective business strategy propelled Meta’s stock to unprecedented levels.
During the second quarter of 2024, Meta’s advertising division brought in $38.3 billion in revenue, marking a 22% increase from the previous year. This figure represented 98% of Meta’s total income, indicating its significant influence on its strategic direction.
Growth has been excellent, propelled by the ongoing trend of digital advertising. Over the last ten years, Meta has achieved a yearly revenue increase of 29.7%. Considering that the worldwide digital ad market is expected to rise to more than $1 trillion by 2030, Meta still has a strong opportunity for further growth.
Meta Platforms, Inc. (NASDAQ:META)’s economic moat is solid as it boasts a return on invested capital (ROIC) of 31%, threefold the mean ROIC of the S&P 500. This indicator shows Meta’s remarkable skill in producing sufficient profits from its reinvested capital. Without this barrier, the ROIC number would be significantly reduced. Likewise, the stocks command an average buy rating on Wall Street with a $611.20 price target, implying a 4.32% upside potential.
By the end of the second quarter, Meta Platforms, Inc. (NASDAQ:META) appeared in the portfolios of 219 hedge funds, with a combined stake value of $42.5 billion.
Polen Focus Growth Strategy stated the following regarding Meta Platforms, Inc. (NASDAQ:META) in its Q2 2024 investor letter:
“In the second quarter, the top relative contributors to the Portfolio’s performance were all names we do not hold: Home Depot, Meta Platforms, Inc. (NASDAQ:META), and AbbVie. Meta Platforms delivered robust results in the period, with revenue growth accelerating in the first quarter. However, revenue comparisons for Meta will become more difficult from here, and its guidance for 2Q revenue fell below market expectations. After the company’s “year of efficiency,” where it cut costs in its core business, management is now indicating another ramp-up in GenAI and metaverse spending, spurring concerns about future profit margins. Metaverse spending, by our calculations, is now over $20 billion per year with little to no expected return on the foreseeable horizon.”
Overall META ranks 3rd on our list of 10 Most Promising Growth Stocks According to Hedge Funds. While we acknowledge the potential of META 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 META, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.