For a large portion of investors who put money in the market, growth is the primary objective. The stocks that these investors prefer are also stocks that are either currently exhibiting strong revenue growth or have product strengths or other competitive advantages that can ensure that they will dominate their markets and grow in the future.
Broadly speaking, it is possible to identify such stocks by looking at which industries are expected to grow strongly. A few years ago, semiconductor design and fabrication was one such sector. Back then, the world’s largest integrated chip manufacturer known for its Core processor lineup had started to struggle. The nature of the semiconductor industry which requires years of research expertise and billions of dollars in capital expenditure meant that the market was not only open to new players but also that this opening favored incumbents that already had the necessary investments and expertise in place.
This gap led to the price-to-earnings (P/E) ratio of the firm which ranked 3rd on our list of 10 AI Stocks That Will Skyrocket to touch astronomically high levels as soon as the firm started to turn a profit. As an illustration, consider the P/E ratio of this stock at Q1 2018’s close. The ratio back then was 111, while the integrated chip manufacturer was trading at 19 and the Taiwanese contract chip manufacturer which ranks 2nd on our list of 10 Best Tech Stocks For Long-Term Investment traded at 16.11. During the same period, Wall Street’s favorite AI GPU stock whose shares have gained 700%+ since OpenAI publicly released ChatGPT was trading at a P/E ratio of 37.
Naturally, this indicated that investors were betting heavily on the firm to grow. Since 2018’s first quarter, its shares have gained a whopping 1,204% while the GPU company has gained 2,175% and the integrated chip manufacturer is down by 57.6%. Between its fiscal years 2017 to the latest trailing-twelve-month revenue, the growth stock that traded at a P/E ratio of 111 in 2018 has grown revenue by 358%, so it’s safe to say that in this case, growth investors were right, and their investments if dearly held since then have outpaced the firm’s revenue in growth terms.
Therein lies the magic of growth stocks, which can generate substantial returns for investors. However, as is the case with all things in life, this promise also comes with a dark side. Research from the University of Michigan shows that growth stocks are punished harder than value stocks in case of negative earnings surprises. For their research, the researchers analyzed consensus earnings forecasts, quarterly share prices, stock prices, P/E ratios, and other variables for 13 years to determine the returns of growth and value stocks that missed or beat analyst earnings estimates.
By bifurcating their results across five categories starting from Low Growth and ending at High Growth, they demonstrate a clear difference between the post-earnings stock returns of growth and non-growth stocks. For the Low Growth stocks, a negative earnings surprise led to -3.57% in share price returns starting two days following the report and ending before the next report. The High Growth stocks led the Low Growth stocks by 3.75 percentage points in negative returns as they lost 7.32% over the same period after posting a negative earnings surprise. The 3.75 percentage point differential is key when we analyze these two categories’ stock price performance after positive earnings surprises. This is because while the Low Growth stocks gained 5.44% after the earnings surprise, the High Growth stocks led them by only 0.88 percentage points by gaining 6.32%.
Similarly, not only are growth stocks punished harder if they miss investor expectations, but the share price drops can make earlier optimism regarding their fortunes appear misplaced as well. The best example of this fact is the software-as-a-service (SaaS) industry. SaaS firms were the pinnacle of growth investing because of their business model which allows them to earn recurring revenue through sizable contracts while keeping costs low. Investor optimism surrounding SaaS stock touched a feverish pitch in Q1 2021 when their median EV/Revenue multiple sat at 14.1x. This meant that the firms’ market capitalization and debt minus cash and other assets were valued 14 times their sales. But, by Q4 2022 this had dropped to 4.6x as a combination of factors such as higher rates leading to tighter business spending and the pivot towards artificial intelligence soured sentiment. SaaS firms were particularly hurt since AI enables businesses to self-develop software which reduces the need for SaaS products and services.
So, with the landscape surrounding growth stocks being as dynamic as their share prices, we decided to look at some aggressive growth stocks with high revenue growth and significant hedge fund interest.
Our Methodology
To compile our list of the best aggressive growth stocks, we first sifted out 12 stocks with annual latest quarter revenue growth greater than 35% from multiple growth ETFs. The stocks were then ranked by the number of hedge funds that had bought the shares during Q3 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 fighter jet in formation, revealing the prowess of the companies defense arm.
Revenue Growth: 37.30%
Number of Hedge Fund Investors In Q3 2024: 57
HEICO Corporation (NYSE:HEI) is a large American industrial products firm that sells aircraft parts, electric systems, and other products that cater to civil aviation and defense industries. Its aircraft business makes it unsurprising that the firm’s shares are up 48% year-to-date given the turmoil that the sector has experienced in the aftermath of Boeing’s quality control fallout. The US aircraft manufacturing giant has slowed its aircraft deliveries which has grown the burden on existing aircraft fleets to meet the needs of a global travel industry still reeling from the impact of the coronavirus pandemic. Consequently, HEICO Corporation (NYSE:HEI)’s share price gain is fueled by the fact that the firm’s aftermarket replacement parts revenue grew by a whopping 79% during H1 2024 to touch $1.2 billion. The firm has also benefited from a $2 billion 2023 acquisition to expand its aftermarket portfolio, and the deal along with continued troubles in the aviation industry could lead to more tailwinds for the stock in the future.
Conestoga Capital Advisors mentioned HEICO Corporation (NYSE:HEI) in its Q3 2024 investor letter. Here is what the fund said:
“HEICO Corporation (NYSE:HEI): Commercial and military aircraft aftermarket parts company which designs, manufactures, repairs and distributes jet engine and aircraft component replacement parts. The company has benefitted from solid travel growth as well as healthy parts and maintenance spending due to the delayed retirement of older aircraft given production issues at Boeing (BA).”
Overall HEI ranks 3rd on our list of the aggressive growth stocks to buy according to hedge funds. While we acknowledge the potential of HEI 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 HEI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
