Is Elastic N.V. (ESTC) the Best Guru Stock To Buy Now?
We recently compiled a list of the 10 Best Guru Stocks To Buy Now. In this article, we will have a look at where Elastic N.V. (NYSE:ESTC) ranks among the best guru stocks to buy now.
Due to the plethora of investment options such as equities, bonds, and mutual funds that are available today, picking the right set of vehicles to either preserve or grow money can often seem to be a daunting task. This makes it unsurprising that one of the most well known quotes of Warren Buffett of Berkshire Hathaway is one where he states “In my view, for most people, the best thing to do is own the S&P 500 index fund.” In fact, Buffett is one of the strongest detractors of picking individual stocks. Further elaborating on this approach, he shares that the “trick is not to pick the right company, the trick is to essentially buy all the big companies through the S&P 500 and to do it consistently and to do it in a very, very low cost way.” This is key, according to the famous investor, since “you do not want to ever get the impression that you can pick stocks.”
However, while stock picking might not be for the everyday investor, for hedge funds, it’s their way of living. Every day hundreds of funds buy and sell shares with the hopes of generating a profit and spotting the next Apple. This approach tends to yield results too, even during tough economic and stock market performance. In fact, last year which saw the stock market bifurcated primarily on the basis of AI and non AI and large and non large cap stocks when it came to returns, nevertheless also saw hedge funds triple their gains for investors.
As per data from LCH Investments, the top 20 best performing hedge funds generated $67 billion in profits for investors in 2023, which surpassed their $63 in profits in 2021 when the stock market was booming after the pandemic. Their true gains however came over the 2022 profits, when high rates universally decimated the market as back then, the top performers had raked in $22.4 billion. Roughly 20% of the bumper $67 figure came from TCI Investments as it raked in $12.9 billion during 2023.
Safe to say, the hedge funds seem to know what they’re doing. This then makes us wonder if there is a way one could combine Buffett’s advice of sticking to a collection of stocks and the top stocks of the hedge funds. Fortunately, there is one such way to do so. This is through the GURU exchange traded fund. This fund, which has produced 16.96% in fund net asset value average annualized gains over the past year, seeks to enable “everyday investors to access the high conviction investments of some of the largest, most sophisticated hedge funds in the world.”
In terms of price, this fund was trading at $40.34 at the start of 2024, meaning that its recent closing price of $46.52 has led to an appreciation of 15.22%. This closely mirrors the benchmark SEC index, which has gained 18.80% year to date. Over the past twelve months, the ETF has gained 24.10% while the S&P is up by 26.52%. This rudimentary analysis ignores the impact of payouts on the fund’s returns, and the ETF has a semi annual payout rate along with an expense ratio of 0.75%.
More than a quarter of its holdings are in the pharmaceutical, biotechnology, and software industries. These are among the highest growth sectors that you are likely to find on Wall Street. As an example, while the benchmark S&P’s forward P/E ratio was 22 in February 2024, the forward ratio for system and application software firms right now is 56.93 while for the biotechnology sector, it is 73.20. This underscores the growth focused nature of the hedge fund industry and the ETF and indicates that perhaps they are positioning themselves for future economic conditions.
These economic conditions see investors widely expecting interest rates to come down. The current sentiment wave started in August when Federal Reserve Chairman Jerome Powell shared at the Jackson Hole conference that “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks. ” This means that firms that require copious capital for growth, such as biotechnology stocks, or those that rely on hefty enterprise spending such as cloud computing and software as a service (SaaS) stocks, can see tailwinds in the future.
This changed sentiment is also reflected in the price of the Guru ETF. In early August when investors were still jittery for rate cuts, the fund’s price had dipped to $41.29 close to the end of the first week. Now, with the debate on Wall Street having shifted to the intensity of the cuts rather than the certainty, the recent price of $46.52 marks a heft 12.7% share price appreciation. This also saw the cloud and pharma stocks jump in the immediate aftermath of the rate cuts but close lower as investors digested the data set.
So, with these details in mind, let’s take a look at what the gurus are doing by checking out the best guru stocks to buy.
Our Methodology
To make our list of the best guru stocks to buy, we ranked the holdings of the Guru ETF by their average analyst share price upside percentage and picked out the stocks with the highest upside.
For these stocks, we also mentioned the number of hedge fund investors based on Insider Monkey’s research. 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).
Elastic N.V. (NYSE:ESTC)
Number of Hedge Fund Holders In Q2 2024: 58
Average Analyst Share Price Target: $102.14
Average Analyst Share Price Target Upside: 36%
Elastic N.V. (NYSE:ESTC) is a Dutch software company headquartered in Amsterdam. It operates in the data analysis sector of the software as a service (SaaS) market. Elastic N.V. (NYSE:ESTC)’s products enable businesses to generate insights and analyze their data, which provides them with key advantages in today’s data and computing driven world. In fact, working with data is key for training artificial intelligence software, and for Elastic N.V. (NYSE:ESTC), this means that its products are seeing greater demand as businesses seek to build their in house AI products and try to decide which data out of their repositories is needed for AI and how to extract it. Additionally, Elastic N.V. (NYSE:ESTC)’s SaaS business model makes it a high margin business with stable recurring revenue in the form of subscriptions. It also means that these metrics are baked into the firm’s hypothesis, and any disappointment on this front can create tailwinds for the stock.
Artisan Partners mentioned Elastic N.V. (NYSE:ESTC) in its Q2 2024 investor letter. Here is what the fund said:
“Elastic is a software company that specializes in search and data analysis solutions. Elastic’s search, observability and security solutions are built on the Elastic Search AI Platform, which thousands of companies use, including more than 50% of the Fortune 500. Customers use the software to gain visibility into their data, reduce mean-time-to-resolution and drive actionable outcomes. We believe the company will benefit from the rise of generative artificial intelligence (AI). It provides a differentiated offering due to the combination of a unique pricing model based on consumption, products that handle numerous data types and volumes, and an open architecture environment that offers generative AI development flexibility.”
Overall ESTC ranks 7th on our list of the best guru stocks to buy. While we acknowledge the potential of ESTC as an investment, our conviction lies in the belief that some 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 ESTC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published on Insider Monkey.