These Money Managers Have Beaten the S&P 500 Like Clockwork: 2 Magnificent Growth Stocks They're Buying Now

The S&P 500 (SNPINDEX: ^GSPC) gained 51% during the three-year period that ended in the June quarter, but hedge fund managers William Harnish and Till Bechtolsheimer trounced those returns. Specifically, Harnish saw his portfolio at Peconic Partners soar 284% during that period, while Bechtolsheimer saw his portfolio at Arosa Capital Management climb 161%.

That profound outperformance is particularly noteworthy because three-quarters of large-cap fund managers underperformed the S&P 500 over the last three years. That puts Harnish and Bechtolsheimer in the minority, which makes them a good source of inspiration for individual investors.

Here are two growth stocks these brilliant hedge fund managers are buying.

1. Shopify

William Harnish of Peconic Partners added a small position in Shopify (SHOP 1.11%) to his hedge fund in the second quarter. The stock accounts for just 0.1% of his portfolio, but it is noteworthy nonetheless given his tremendous outperformance in recent years.

The investment thesis is simple: Shopify is the market leader in e-commerce and omnichannel commerce software, and its platform powered 10% of online retail sales in the U.S. last year, second only to Amazon. That success reflects an uncommon (if not unique) ability to help businesses grow their brand across multiple sale channels.

Shopify's subscription software allows merchants to manage brick-and-mortar shops and a wide range of digital storefronts from a single dashboard. That includes online marketplaces like Amazon and Etsy, social media like Instagram and Facebook by Meta Platforms, and direct-to-consumer websites. Shopify also provides a broad selection of adjacent services, including solutions for financing, logistics, and payment processing.

The Canadian e-commerce company wowed Wall Street with its second-quarter report, beating consensus estimates on the top and bottom lines. Revenue soared 31% to $1.7 billion and non-GAAP net income improved to $0.14 per diluted share, up from a loss of $0.03 per diluted share a year earlier.

Going forward, global retail e-commerce sales are expected to increase at 13.6% annually through 2030, according to Ameco Research, but Shopify should grow even faster given its strong competitive position and sensible growth strategy. For instance, the company is working to increase its market share by drawing more enterprise customers to its platform with sophisticated tools for marketing and wholesale commerce. The company is also leaning into the rapidly growing demand for artificial intelligence software with Shopify Magic, a tool that automates tasks like writing product descriptions, redesigning storefronts, and responding to customer questions.

With that in mind, Morgan Stanley analyst Keith Weiss says Shopify could earn $25 billion in revenue by 2030, implying annualized sales growth of 20% in the interim. That makes its current valuation of 10.9 times sales look very reasonable, and that multiple is an absolute bargain compared to the three-year average of 28.6 times sales. Investors should feel comfortable buying a small position in this growth stock right now.

2. SolarEdge Technologies

Till Bechtolsheimer of Arosa Capital Management quintupled his stake in SolarEdge Technologies (SEDG 2.81%) over the past year. The stock now accounts for nearly 6% of his portfolio, and it ranks as his third-largest holding. The high conviction implied by that position sizing is particularly noteworthy because Bechtolsheimer tripled the performance of the S&P 500 over the last three years.

The investment thesis is straightforward: The solar energy systems market is expected to grow at 15.7% annually to reach $608 billion by 2030, according to Grand View Research, and SolarEdge should benefit accordingly given its position as the largest manufacturer of solar inverters. For context, inverters convert the direct current electricity produced by solar systems into alternating current electricity that can be used by homes and businesses.

SolarEdge has achieved that success due in large part to its invention of the power optimizer, a device that adjusts current and voltage in real time to improve solar module performance. Power-optimized inverters eliminate losses from asymmetrical rooftops and module mismatch that plague traditional string inverters, and they are cheaper than microinverters from Enphase.

SolarEdge delivered impressive financial results in the second quarter. Revenue rose 36% to $991 million and non-GAAP net income soared 176% to $2.62 per diluted share. But guidance fell short of expectations. Management believes third-quarter revenue will grow no faster than 10% due to softening demand for solar systems brought on by higher interest rates and excess inventory across various distribution channels.

However, those problems are not specific to SolarEdge, nor are they permanent. The solar energy systems market is forecasted to grow quickly in the coming years, and SolarEdge should benefit greatly from that momentum given its leadership in solar inverters. Additionally, the company has expanded its addressable market by branching into adjacent areas like residential and commercial batteries, electric vehicle chargers, and energy management software.

All things considered, investors should expect annual revenue growth in the mid-teens through the end of the decade. That makes its current valuation of 2.6 times sales look cheap, and it's certainly a discount to the three-year average of 7.6 times sales. Investors should make good on that opportunity by purchasing a small position in this renewable energy stock today.