Hedge funds are specialized investment funds that aim to generate returns regardless of overall market conditions. Hedge fund managers tend to be skilled stock pickers, as they have the resources to conduct thorough research and analysis. They also often have industry connections that provide valuable insights. As such, keeping an eye on the stocks hedge funds buy can be a smart way for individual investors to find strong prospects.
However, their stock picks should not be viewed as a crystal ball. Even the best hedge fund managers do not have perfect track records. The market involves luck as well as skill. So, while these stocks deserve consideration, each should still be scrutinized before individuals make investment decisions.
It’s also important to note that the 13F filings showing hedge fund positions are not real-time. They can lag by up to 45 days. A fund could have already sold a stock that still shows in its latest 13F. Thus, these filings provide clues worth investigating, but not definitive proof that a stock remains in favor.
Even with those cautions, exploring which stocks hedge funds are buying can give you a decent head start. Notably, I will not include the big names most investors may first think of in this article, since everyone knows hedge funds love the so-called “Magnificent Seven.” You wouldn’t get much value out of me discussing what you (most likely) already know.
With that in mind, let’s take a look at the following three growth stocks I think are worth considering.
Hagerty (HGTY)
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This unique company caters to classic car lovers, providing specialized insurance for vintage vehicles not used for regular transportation. Hagerty (NYSE:HGTY) also operates a club community for enthusiasts, publishes magazines, hosts events, and runs a popular website.
Unfortunately, HGTY stock has not performed well since going public in late-2021. The stock has meandered between $7 and $9 per share for over a year now, unable to gain traction. Profitability is lacking, which appears to have turned off most of Wall Street. However, Hagerty has impressively grown revenue by 27% year-over-year, hitting $788 million for 2022. Strong 27% top-line growth continued into Q3 2023 as well. Despite margin struggles, this business’ potential seems to be robust. Indeed, there is no shortage of classic car devotees.
Currently, HGTY stock trades at just 0.66-times forward expected 2023 sales, which appears to be a reasonable multiple for such a fast-growing company. While profits have been elusive, analysts forecast earnings per share to surge 208% this year and 65% into 2025. This translates to a forward price-earnings ratio of 35-times, based on 2025 projections. I believe once economic turbulence and interest rates come down, Hagerty’s profit margin can expand substantially.
I understand why Hagerty has appeared on recent 13F filings from prominent hedge funds for these reasons. Despite profitability issues, the company’s niche business model and impressive revenue growth likely attracted their interest. The stock could return to favor if Hagerty continues producing top-line growth, and making gradual progress on its operating margins.
Evolv Technologies (EVLV)
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Evolv Technologies (NASDAQ:EVLV) uses sensors and artificial intelligence to detect weapons and threats without impeding visitor flow. Their systems are deployed at stadiums, schools, hospitals, museums, and other venues to flag prohibited items while allowing freedom of movement.
Considering heightened security risks nowadays, I believe Evolv provides a valuable solution by blending safety, efficiency, and cutting-edge technology. This niche should continue growing as organizations prioritize protecting people in public spaces. While Evolv’s stock price has wandered between $2 and $5 per share for nearly two years now, I think a price breakout could be forthcoming.
Despite lackluster price action thus far in 2024, Evolv’s financial performance tells a bullish tale, even if profitability is still on the horizon. Revenue has grown swiftly, with 40% top-line quarterly beats over estimates on average since mid-2021. Losses are also narrowing rapidly, expected to nearly halve annually as sales quadrupole from $115 million in 2024 to $400 million in 2027, per analyst projections.
Given the vital and expanding niche Evolv occupies, I understand why hedge funds are taking positions now, before a potential upside move. The company has missed a few recent earnings per share targets, so profits could take longer to materialize than hoped for. But with brisk sales growth and a technologically advanced offering, EVLV seems poised to reach scale. This stock has breakout potential once profitability initiates.
Paycom Software (PAYC)
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Paycom (NYSE:PAYC) offers a popular cloud-based payroll and human capital management platform. The company’s comprehensive software enables enterprises to handle employee pay, benefits, compliance, performance reviews, and other critical HR functionality through user-friendly online tools.
Zooming out, Paycom’s chart reveals a steep 71% share price plunge from 2021 to November 2023 lows. But the stock has rebounded sharply since then, aligned with Paycom’s recovering financials. As artificial intelligence integrates further into business processes, demand for Paycom’s HCM solutions seems likely to persist – especially from large corporations with abundant employees.
Paycom’s profitability stands out, with a 21% net margin that tops 90% of software firms. The company’s balance sheet also impresses, with 16.7-times more cash than debt. Despite the recent bounce, PAYC stock still trades at a reasonable forward price-earnings ratio of 24-times based on 2024 projections. With analysts forecasting 22% sales growth in 2023 and sustained double-digit revenue growth ahead, I believe the stock warrants a higher earnings multiple. Cloud stocks warrant huge premiums, so I expect PAYC stock to trend higher over the coming years as the adoption of AI-enhanced HCM tools continues to rise.
On the date of publication, Omor Ibne Ehsan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.