We recently compiled a list of the 12 Best Aggressive Growth Stocks To Buy According to Hedge Funds. In this article, we are going to take a look at where Tradeweb Markets Inc. (NASDAQ:TW) stands against the other aggressive growth stocks.

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 Wall Street trader on the phone, quickly executing a technology-driven trade.

Tradeweb Markets Inc. (NASDAQ:TW)

Revenue Growth: 36.50%

Number of Hedge Fund Investors In Q3 2024: 34

Tradeweb Markets Inc. (NASDAQ:TW) is a New York-based financial services firm that enables institutional and professional investors to trade asset classes, run data analytics, and conduct associated operations. It is a sizable company with $7.3 billion in total assets as of the third quarter. Tradeweb Markets Inc. (NASDAQ:TW)'s reliance on financial markets means that the firm prospers as activity in sectors such as fixed income and derivatives grows and remains robust. Higher rates followed by a rate cut cycle typically mean that rate fixed assets see greater investor interest, and Tradeweb Markets Inc. (NASDAQ:TW)'s shares have gained 46% year-to-date as higher commissions and trading activity led to a 30% commission revenue growth in H1 2024. Looking ahead, since rate derivatives, corporate bonds, and municipal bonds account for nearly 75% of Tradeweb Markets Inc. (NASDAQ:TW)'s revenue, activity in these markets will drive the firm's hypothesis.

Tradeweb Markets Inc. (NASDAQ:TW)'s management shared insights into its credit business during the Q3 2024 earnings call. Here is what they said:

"Strong double-digit revenue growth was driven by 37% and 14% year-over-year revenue growth across U.S. and European credit respectively. We also achieved strong double-digit revenue growth across credit derivatives, Munis and China bonds. Automation continues to surge with global credit AiEX average daily trades increasing over 25% year-over-year.

We achieved our second highest fully electronic market share across U.S. IG helped by IG block market share of over 8%. We also achieved our second highest fully electronic high yield market share with record high yield block market share of nearly 5%. During the quarter, we achieved a new monthly high yield record of 9% in July. Our institutional business continues to scale as clients adopt our diverse set of protocols. Year-to-date, we estimate over 40% of our U.S. institutional variable revenue growth was driven by non-market factors, mainly market share. Our primary focus on growing institutional RFQ continues to pay off with average daily volume growing over 45% year-over-year with strong double-digit growth across both IG and high yield.

Moreover, portfolio trading average daily volume rose over 50% year-over-year with growth of over 70% across IG portfolio trading and over 20% growth across high yield. We continue to focus on leading with innovation and this is resonating with our clients leading to user growth of over 20% year-over-year. Retail credit revenues were up over 15% year-over-year as financial advisors continue to allocate investments towards credit to compliment their buying of U.S. treasuries and retail certificates of deposits. All trade produced a solid quarter with over $185 billion in volume, up over 35% year-over-year. Specifically, our all-to-all average daily volume grew over 20% year-over-year and our dealer RFQ offering grew over 25% year-over-year. The team continues to be focused on broadening out our network and increasing the number of responders on the all trade platform.

In the third quarter, the average number of responses per all-to-all inquiry rose over 10% year-over-year. We also continue to increase our engagement and wallet share with ETF market makers with average daily volume up over 45% year-over-year. Finally, our session’s average daily volume grew over 45% year-over-year. Looking ahead, U.S. credit remains a key focus area and we like the way we are positioned across our three client channels. We believe we have a long runway for growth with ample opportunity to innovate alongside our clients. During the quarter, we enhanced our multi-client net spotting offering based on client feedback, expanded our PT offering to include auto send capabilities and continue to see growing adoption of our RFQ Edge offering."

Overall TW ranks 7th on our list of the aggressive growth stocks to buy according to hedge funds. While we acknowledge the potential of TW 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 TW but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

 

READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.

 

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