We recently published a list of 8 High Growth High Margin Stocks to Invest In Now. In this article, we are going to take a look at where PDD Holdings Inc. (NASDAQ:PDD) stands against other high growth high market stocks to invest in.
How Market Trends Shape Opportunities
When investor confidence is high, capital tends to flow into growth sectors, driving up stock prices and valuations. This is particularly relevant for companies with strong growth prospects and high margins, as they are often seen as more resilient in a recovering economy. Current market dynamics indicate that much of the upward movement may be attributed to multiple expansions rather than just earnings growth. High-growth stocks typically trade at higher price-to-earnings ratios, so if the market continues to expand, these stocks could benefit significantly as investors are willing to pay a premium for growth potential.
Jason Trennert, Strategas Research Partners chairman and CEO, joined CNBC’s ‘Squawk Box’ on October 3 to discuss the latest market trends and the state of the economy, highlighting that the bar is high to get bearish now.
Jason Trennert revealed that he turned bullish at the end of 2023 after initially predicting a recession. Despite the challenges of 2022 and early 2023, which made it difficult to envision a market recovery, he noted that the market has defied expectations and continued to rise. Trennert attributed a significant portion of this upward movement to multiple expansions rather than just earnings growth. He marked a pivotal moment in 2023 as the failure of Silicon Valley Bank, which led to increased liquidity in the market and a subsequent rally. He recalled that around eleven months ago, the S&P 500 briefly hit 4,100 when ten-year yields reached 5%, suggesting that market dynamics have shifted considerably since then.
When discussing current valuations, Trennert pointed out that the market is trading at approximately 22 times earnings during an easing cycle. He expressed skepticism about future earnings growth, as expectations for a 14% increase in S&P earnings next year seem inconsistent with the anticipated six rate cuts from the Fed. He emphasized that if the market is expecting such significant easing while also projecting strong earnings growth, there may be a disconnect.
Trennert also addressed concerns regarding government spending and deficits, noting that the federal deficit has reached 7% of GDP and expressing a desire for more free-market-oriented policies rather than gridlock in Washington. He criticized both parties for their lack of commitment to reducing deficits and highlighted the moral hazard created by prolonged quantitative easing over the past 12 years. He believes that this situation has led to irresponsible spending practices that will eventually necessitate accountability. Despite these concerns, Trennert acknowledged that it is challenging to adopt a bearish outlook given current market conditions. He noted that ten-year treasury yields above 4.5% typically lead to market indigestion, while yields below this threshold make it hard to remain pessimistic.
As for small-cap stocks, Trennert pointed out that they have historically been underrepresented in portfolios and may offer opportunities for future growth. He highlighted that many venture capital-backed firms are looking to go public, with approximately 45% of them potentially tapping into the IPO market at some point. However, he cautioned that if the economy continues to slow down and earnings growth expectations are not met, small caps may struggle.
Skepticism about the projected earnings growth for the S&P 500 could also apply to high-growth stocks. If expectations for earnings growth are too optimistic relative to economic conditions, such as anticipated rate cuts, it may lead to volatility in high-growth stocks, especially if actual earnings do not meet these elevated expectations. Companies with high-profit margins are generally better positioned to weather economic downturns. As Trennert noted concerns regarding government spending and deficits, firms that maintain or improve their profit margins may be more attractive to investors seeking stability amidst economic uncertainty.
Trennert’s overall analysis underscores the importance of monitoring government policies and economic indicators as they influence investor sentiment and market performance moving forward. Still, his predominantly bullish sentiment lays the groundwork for a lot of investors, and to make the portfolio expansion process even easier for them, we’re here with a list of the 8 high growth high margin stocks to invest in now.
Methodology
We sifted through Finviz to compile an initial list of the top stocks. From that list, we narrowed our choices to 15 companies with TTM net profit margin above 20% and 5-year net income compound annual growth rates above 25%. We then selected the 8 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).
A close-up of a customer using the company’s e-commerce platform whilst shopping online.
PDD Holdings Inc. (NASDAQ:PDD)
5-Year Net Income CAGR: 74.92%
TTM Net Profit Margin: 28.93%
Number of Hedge Fund Holders: 86
PDD Holdings Inc. (NASDAQ:PDD) is a Chinese online retailer that focuses on group buying and discounted prices. It offers products like consumer electronics, apparel, groceries, and more. Its business model revolves around aggregating large groups of buyers to negotiate lower prices from suppliers, passing the savings on to its users.
It also owns the online marketplace Temu, which is expanding rapidly in Europe and North America and has the potential to become one of the world’s most popular online shopping destinations. The company has experienced impressive growth in the second quarter of 2024, making $13.63 billion in total revenue, an increase of 89.93% from a year-ago period, driven by an increase in revenues from online marketing services and transaction services. Revenues from the marketing services and others were up 29%. Revenues from transaction services were up 234%.
In Q2, the top-line growth slowed down significantly versus the last few quarters. Further slowdown is inevitable as a result of competition and global uncertainties. However, the user base and cross-border business continue expanding. PDD Holdings Inc. (NASDAQ:PDD) has invested heavily in R&D to improve its platform for merchants and customers, contributing to its overall success and growth.
In September, its stock price soared 40% due to China’s economic stimulus efforts. Despite a negative news item regarding trade loopholes, the broader market rally fueled by interest rate cuts, reserve requirement reductions, and a focus on boosting consumer spending lifted the company. Later in the first 10 days of October, its stock was down 7.2% this week, but investors are still up 314% over the past 5 years despite the recent dip. The company recently turned profitable, which could explain the long-term growth.
Hayden Capital stated the following regarding PDD Holdings Inc. (NASDAQ:PDD) in its Q2 2024 investor letter:
“PDD Holdings Inc. (NASDAQ:PDD): A few weeks ago, Latepost (a leading Chinese technology news outlet) confirmed Pinduoduo’s online grocery initiative is solidly profitable (LINK). According to the article, Duoduo Grocery is able to achieve ~5% net profit margins in competitive markets (where they go up against Meituan Select). In non-competitive markets, they can achieve ~10 – 15% net margins.
The company doesn’t disclose the exact scale of Duoduo Grocery, but our calculations indicate it’s likely around ~RMB 300BN this year, and still growing in the double-digits. At that level, the division is likely contributing ~US $2.5BN in annual profits.
It’s an impressive result, but admittedly, not a huge needle-mover in light of the total $17.6BN net profits the company is expected to make this year (~14% of overall profits)…” (Click here to read the full text)
Overall, PDD ranks 2nd on our list of high growth high market stocks to invest in. While we acknowledge the growth potential of PDD as an investment, 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 PDD 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 is originally published at Insider Monkey.