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Stock market geeks like me look forward to a special market event four times a year, and it just happened.
No, not winning season. I’m talking about when my favorite fund managers reveal what they bought in the past quarter – so I can come up with some stock ideas for you and me.
Managers disclose their activities in “13F†forms typically filed 45 days after each quarter. So another data dump just happened.
One group of funds that I like to follow closely is New York-based Baron Capital Management.
Not only does the company have (for the most part) excellent records on its funds, it generally likes to “think outside the box,” as Steve Jobs put it.
This can be a big plus for investing as opposed to traveling with the pack. Baron also places big bets on companies with “big ideas†and winning qualities such as lasting competitive advantages.
Great Tesla victory
This strategy leads to disproportionate victories. Most notably, Ron Baron and his team have remained loyal to Tesla TSLA,
back in the days when almost everyone considered Elon Musk and his electric car idea laughable. It was a smart decision. Baron told CNBC he made $ 6 billion on the bet for himself and his shareholders.
Another tactic that sets Baron Capital apart is its willingness to exploit position size. While many mutual funds cap their positions at 1% to 2% of their portfolios to manage risk, it is not uncommon for Baron funds to have positions of 4% or more. This helps to better understand what the company really likes. The Baron BFGFX Targeted Growth Fund,
led by Ron Baron, holds a spectacular 32.6% position in Tesla, or 248.9 million shares. (Morningstar thinks this creates too much risk.)
To find other promising preferred stocks by Baron Capital, I just looked at all of the positions in its new 13F files to distinguish which ones have grown significantly in size, as long as they weren’t tiny positions. I favor names that are over 3% in size, except in the case of Initial Public Offerings (IPOs) and a cannabis name, as it is a popular space. I also favored investments in Baron funds with excellent outperformance.
Here’s a look at some of the most interesting third quarter stock moves at Baron. All data is as of September 30, 2021.
High growth technology companies
Alex Umansky has a great track record in his Baron Fifth Avenue growth fund, so it’s a great place to start. The fund has beaten its large-mid-cap US Morningstar broad growth index and broad growth category by approximately 24 percentage points annualized over the past five years. You can read more about the fund here.
Umansky likes companies with sustainable competitive advantages that gain market share. One cloud computing company that matches the bill is ServiceNow NOW,
He increased his stake by 7%, and that’s a significant position of 4.8%. In the chip sector, he favors Nvidia NVDA,
increasing its stake by 33%. This is a disproportionate position of 3%.
Among the tech names aimed at consumers, Umansky favors Shopify SHOP,
in e-commerce and Square SQ,
in digital payments. Both positions increased from around 30% to 3% of the portfolio each. He also added a new position in this space, the Singapore-based e-commerce platform Sea SE,
This is only a 1% position, but it is a new asset and this makes it particularly attractive.
What about the guy who was the face of the big bet on Tesla? Ron Baron’s Baron Focused Growth Fund has significantly increased the size of its position in Guidewire Software GWRE,
which offers software that helps insurance companies upgrade their back offices. This position increased from 78% to almost 3% of the portfolio. He also increased his position in the streaming company Spotify SPOT,
from 53% to almost 4% of the portfolio. Its fund has beaten its Morningstar Mid-Cap Growth category by 21 percentage points annualized over the past five years.
Reopening of the games
Covid cases are on the rise, especially in Europe and the United Kingdom, but also in the United States. This is starting to weigh on the markets, especially “reopening†games. If you want to bet against the grain of fear that Covid will shut down travel and entertainment venues again, consider Hyatt Hotels H,
and Red Rock Resorts RRR,
Baron increased his positions in these names by 32% and 24% in his Focused Growth Fund, and they are now held at 4.5% and 1.7%.
Healthcare and biotechnology actions
Neal Kaufman, who manages Baron Health Care Retail Fund BHCFX,
enjoys looking for pickaxe and shovel games in healthcare. They have predictable revenues because they offer equipment, chemicals, and other products that help biotech companies research therapies. You can read more about his fund here.
Kaufman had just increased the size of the position in two pieces on this theme – Thermo Fisher Scientific TMO,
(+ 42%) and Bio-Techne TECH,
(up 18%). Both are large positions of 4%. Then Kaufman increased his MaxCyte MXCT position,
from 55% to 1.5% of the portfolio. The company offers a cell engineering platform used by pharmaceutical companies to research therapies. He also started a new play on this theme – Stevanato STVN,
an Italy-based equipment supplier that went public in the United States in July.
True nonconformists should take a close look at biotechnology now. The SPDR S&P Biotech XBI,
Exchange Traded Fund (ETF) is down over 12% this year and the iShares Biotechnology ETF IBB,
rose only 2%, compared to 27% for the S&P 500.
In biotechnology, Kaufman took on a new position in Natera NTRA,
in genetic testing diagnostics. This was his biggest position and a big bet, at 6% of the portfolio. He also added to his position in therapeutic antibody company Argenx ARGX,
The position increased from 14% to 3.5% of the portfolio.
Among the big names in pharma, Kaufman increased its positions in Abbott Laboratories ABT,
and Eli Lilly LLY,
33% and 72%. They are at 1.8% and 2.5% of positions.
Recent IPOs
Baron is a large group of funds, which gives it the privilege of accessing IPOs at offer prices. With hot IPOs, that entry will usually be well below the level where the IPO trades on day one. This puts individual investors at a disadvantage. One way to get around this problem is to be patient and wait for IPOs to fall below their trading level on the opening days. This is the case of three IPOs which seem interesting because they are held by the Baron Discovery Fund BDFFX,
They are still trading above their offer prices, but they are all well below where you would have bought them on open days. They are: ForgeRock FORG,
in digital identity management; Final health DH,
in sales management software; and Clearwater CWAN,
in accounting software. Umansky took a position in Toast TOST,
which sells software used in the restaurant industry.
Cannabis business
In marijuana, the Baron Discovery Fund initiated a position in Hydrofarm HYFM,
This is a pickaxe and shovel game that sells lighting and irrigation equipment, nutrients, and other products used to grow plants, including cannabis.
One problem with all of these names is that we don’t know at what prices the Baron funds bought them. But a key principle of the Baron approach is to invest for the long term. So I guess Baron still likes these companies even though they may be up significantly from Q3 prices. If so, one solution is to consider taking starting positions now and adding weakness.
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned TSLA, GWRE, and RRR. Brush suggested TSLA, NOW, NVDA, GWRE, H, RRR, TMO, XBI, IBB, ABT and LLY in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.
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