Hedge fund managers Jim Simons of Renaissance Technologies and Jason Kritzer of Eaton Vance Management helped their funds outperform. S&P 500 in the last three years. That may not be impressive, but a relatively small number of professional money managers have actually beaten their benchmarks, meaning Simons and Kritzer are in rarefied air. It also means that they could be a great source of inspiration for individual investors.
The two hedge fund managers bought shares throughout the bear market that began in 2022. Since the beginning of last year, Simons has doubled his fund’s holdings in Airbnb (ABNB -0.16%)while Kritzer added to the participation of his fund in Paycom software (PAYC 0.47%) and Airbnb.
Is it time to buy these growth stocks?
Airbnb is an online travel agency (OTA) with a disruptive business model. Rather than building rental properties and hotels, the company crowdsources inventory from a network of more than 4 million hosts. That makes Airbnb much more agile than traditional hospitality companies. It can add new listings to its marketplace in minutes, without spending millions of dollars, and it can easily target marketing campaigns to potential guests in high-demand destinations (or potential guests in high-supply destinations) to build and efficiently use their inventory.
Airbnb also offers hosts greater flexibility in terms of property type and location. Their listings range from typical suburban homes and urban apartments to luxurious estates and designer penthouses. In addition, Airbnb recently added flexible search parameters and search categories that help guests find the perfect rental in places they never thought to look. This means that the platform is evolving into a recommendation engine.
Despite the economic downturn, Airbnb delivered strong financial results in the third quarter. Revenues increased 29% to $2.9 billion, and free cash flow (FCF) climbed 81% to $960 million, representing a solid FCF margin of 33%. And investors have good reason to believe that the company can maintain its high growth trajectory for years to come.
Airbnb’s asset-light business model gives it an edge over traditional hospitality companies, and it has carved out a strong position in the OTA market. Airbnb is currently the second most visited website in the accommodation and hotel category, and is ranked as the fourth most downloaded travel app in the world in 2022, according to Apptopia. Airbnb reported a gross booking value of $61 billion last year, but management estimates its total addressable market at $3.4 trillion, which means the company has only realized a fraction of its potential.
2. Paycom software
Paycom provides human capital management (HCM) software that helps companies manage all aspects of the employee lifecycle, from hiring to retirement. Its core product is payroll software, but it also provides tools for talent acquisition, time and attendance, scheduling and human resources (HR) management.
HCM software may not be exciting technology, but Paycom stands out for product innovation and great customer service. Its HCM suite includes more than two dozen applications, meaning companies can deploy a single platform instead of a patchwork of point solutions.
In addition, Paycom personalizes its customer relationships by assigning a dedicated service specialist to each customer. These qualities make their HCM platform very sticky, as evidenced by a steady increase in retention over the years.
Paycom recently released a strong third quarter report. Revenue climbed 30% to $334 million, and earnings rose 73% to $0.90 per share. Better yet, investors have good reason to believe the momentum will continue. Paycom has only captured 5% of its total addressable market, but the company is executing a strong growth strategy.
Last year, Paycom launched the industry’s first self-service payroll software, dubbed Beti (Better Employee Transaction Interface). Beti automates payroll, requiring workers to review and approve payroll before finalization. That leads to fewer payroll errors, which means HR managers spend less time correcting mistakes.
Thanks to Beti, Fast Company recognized Paycom as one of the most innovative companies in the world last year. Better yet, it was the only HR and payroll technology company to make the list, and that ability to innovate should keep Paycom at the forefront of the industry.
Shares currently trade at 14 times sales, a discount to the three-year average of 21.8 times sales. Therefore, investors should buy a few shares of it growth stock today