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 Microsoft Corporation (NASDAQ:MSFT) 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.

Image by Tawanda Razika from Pixabay

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).

Microsoft Corporation (NASDAQ:MSFT)

Number of Hedge Fund Holders: 279

Microsoft Corporation (NASDAQ:MSFT) has etched its name as an artificial intelligence investment play. Having invested nearly $13 billion into OpenAI, the tech giant is increasingly leveraging AI to strengthen its software offerings. Likewise, its 25% market share in cloud computing, one of the fastest-growing sectors, underscores why it is one of the most promising growth stocks according to hedge funds.

Its latest AI offerings are broadening its impact in Azure, the cloud computing unit. During the fiscal fourth-quarter earnings call, management mentioned that Azure now boasts 60,000 AI clients, which is about 60% more than the previous year’s period, affirming the underlying growth.

In addition to cloud computing, Microsoft Corporation (NASDAQ:MSFT) also boasts of a robust gaming unit spearheaded by the Xbox console. The acquisition of Activision Blizzard has strengthened the company’s prospects in the multibillion-dollar gaming sector, positioning it to generate long-term value.

Microsoft Corporation (NASDAQ:MSFT) regularly achieves solid financial results; its most recent quarter was no exception. Its income from sales and operating earnings both rose by 15% compared to the previous year, showing remarkable performance for a company of its stature. Its earnings per share (EPS) reached $2.95, surpassing analyst estimates. The rise in Microsoft’s earnings per share (EPS) proves its skill in boosting profits while maintaining steady growth across various businesses.

While the stock trades at a premium with a price-to-earnings multiple of 31, it boasts of one of the highest dividend yields of 0.80% among the magnificent 7, making it an ideal growth stock for passive income.

While analysts on Wall Street rate Microsoft as a Buy, it commands an average price target of $504.73, implying 20.93% upside potential. In the second quarter, 279 hedge funds held positions in Microsoft Corporation (NASDAQ:MSFT), and their stakes amounted to $89.07 billion.

Here is what Baron Opportunity Fund said about Microsoft Corporation (NASDAQ:MSFT) in its Q2 2024 investor letter:

Overall MSFT ranks 2nd on our list of 10 Most Promising Growth Stocks According to Hedge Funds. While we acknowledge the potential of MSFT 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 MSFT, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.