When looking for growth stocks to buy, I like to see what the pros have been up to. In Q2, Henry Ellenbogen made some interesting moves.
Ellenbogen is the chief investment officer of Durable Capital Partners, a hedge fund that invests in growth companies. Prior to this, he was a vice president at T. Rowe Price, where he managed the highly successful New Horizons Fund.
Over the years, he has gained a reputation for investing in firms that have an ‘act two’. In other words, a second avenue of growth with a new product or adjacent market. He aims to anticipate these shifts and benefit from a company’s transition to a larger size.
Second chapters
Looking at his 44-stock portfolio, I see various growth companies that match this criteria.
Gaming platform Roblox, for example, has amassed 112m average daily active users. With this massive user base, which is highly engaged and growing, the advertisement opportunity is simply enormous.
Right now, Roblox is posting losses on a statutory basis, which adds risk. But advertising should become an extremely lucrative second act that turbocharges the firm’s profitability. So I’m not surprised that Ellenbogen increased his Roblox position by 32% in Q2.
For the record, I also bought Roblox shares earlier this year.
Meanwhile, Duolingo continues to cement its position as the world’s leading language learning app. However, it’s also adding users to its maths, music, and chess courses, while embedding AI deeply across the entire company.
Ellenbogen also significantly upped his position in MercadoLibre (+155%). The Latin American e-commerce giant is applying for a banking licence in Mexico while growing its digital advertisement business at a rapid clip.
Finally, a new position was started in Veeva Systems. This is a leading provider of cloud-based software and data for the global life sciences industry. But Veeva is expanding into other industries, including consumer goods and cosmetics.
The Amazon playbook
For me, one of Durable Capital’s most interesting holdings is Coupang (NYSE:CPNG). This was Ellenbogen’s second-largest holding in Q2, with a 5.6% weighting.
Coupang is often called the ‘Amazon of Asia’, which gives a flavour of what it does. It dominates South Korea’s e-commerce and online grocery landscape, delivering products in a matter of hours. Over 70% of the population lives within 10 minutes of one of its logistics hubs.
Revenue has surged from $12bn in 2020 to over $30bn last year. Wall Street sees this figure rising above $50bn by 2028.
So, what is Coupang’s second act? Well, there’s growing fintech offerings as well as international expansion. It also bought the Farfetch luxury marketplace last year.
But perhaps the biggest opportunity is its AI cloud computing service (Coupang Intelligent Cloud). The firm has long used its own AI computing infrastructure to improve operations, and now it’s opening this up to external clients. This is straight from Amazon’s AWS cloud computing playbook.
Due to Coupang’s aggressive investments, profitability has been patchy. It also faces stiff competition outside South Korea in both e-commerce and cloud computing. But a price-to-sales ratio of 1.65 is not a bananas valuation.
Better still, the company is expected to start ramping up profitability. This should see the forward price-to-earnings multiple fall below 30 by 2027.
I think investors should check out this growth stock at $28.
