Stock geeks like me look forward to a special market event four times a year, and it just happened.
No, not earnings season. I’m talking about when my favorite fund managers reveal what they bought during the previous quarter — so I can find stock ideas for you and me.
Managers reveal their activities in “13F” forms typically filed 45 days after every quarter. So another data dump just happened.
A fund group I like to track closely is Baron Capital Management, based in New York.
Not only does the firm (mostly) have great records at its funds, but it generally likes to “think different,” as Steve Jobs used to say.
That can be a big plus in investing, as opposed to traveling with the pack. Baron also makes big bets on companies with “big ideas” and winning qualities such as sustainable competitive advantages.
Big Tesla win
This strategy leads to outsized wins. Most notably, Ron Baron and his team stuck with Tesla
back when almost everyone considered Elon Musk and his electric-car idea to be laughable. That was a smart move. Baron has told CNBC he made $6 billion on the bet for his shareholders and himself.
Another tactic that sets Baron Capital apart is its willingness to go big on position size. While a lot of mutual funds cap positions at 1%-2% of their portfolios to manage risk, it’s not uncommon for Baron funds to have 4% positions, or larger. This makes it easier to understand what the firm really likes. The Baron Focused Growth Fund
run by Ron Baron, has a spectacular 32.6% position in Tesla, or 248.9 million shares. (Morningstar thinks this creates too much risk.)
To find other promising stocks favored by Baron Capital, I just looked at all the holdings in its fresh 13F filings to single out ones that increased significantly in size, as long as they were not minuscule positions. I favor names that are greater than 3% in size, except in the case of initial public offerings (IPOs) and one cannabis name, because that’s a popular space. I also favored holdings of the Baron funds with excellent outperformance.
Here’s a look at some of the most interesting third-quarter stock moves at Baron. All data are as of Sept. 30, 2021.
High-growth tech companies
Alex Umansky has an excellent record at his Baron Fifth Avenue Growth Fund, so it is a great place to start. The fund beats its Morningstar U.S. large-mid-cap broad growth index and large growth category by around 24 percentage points annualized over the past five years. You can read more about the fund here.
Umansky likes companies with lasting competitive advantages that are gaining market share. A cloud-computing company that fits the bill is ServiceNow
He increased his stake by 7%, and it is a sizable 4.8% position. In the chip sector, he favors Nvidia
increasing his holding by 33%. It’s an outsized 3% position.
Among consumer-facing tech names, Umansky favors Shopify
in ecommerce and Square
in digital payments. Both positions increased by around 30% to 3% of the portfolio each. He also added a new position in this space, the Singapore-based ecommerce platform Sea
This is just a 1% position, but it’s a new holding and that makes it especially attractive.
What about the guy who was the face of the big bet on Tesla? Ron Baron’s Baron Focused Growth Fund increased its position size substantially in Guidewire Software
which offers software that helps insurance companies upgrade their back offices. This position went up 78% to nearly 3% of the portfolio. He also upped his position in the streaming company Spotify
by 53% to nearly 4% of the portfolio. His fund beats its Morningstar mid-cap growth category by 21 percentage points annualized over the past five years.
Covid cases are rising again, especially in Europe and the U.K., but also in the U.S. This is beginning to weigh on the markets, particularly “reopening” plays. If you want to make a contrarian bet against the fear that Covid will shut down travel and entertainment venues again, consider Hyatt Hotels
and Red Rock Resorts
Baron increased his positions in those names by 32% and 24% in his focused growth fund, and they are now 4.5% and 1.7% holdings.
Health care and biotech stocks
Neal Kaufman, who manages the Baron Health Care Retail Fund
likes to look for “pick-and-shovel” plays in health care. They have predictable revenue because they offer equipment, chemicals and other products that help biotech companies research therapies. You can read more about his fund here.
Kaufman was just increasing position size in two plays on this theme — Thermo Fisher Scientific
(up 42%) and Bio-Techne
(up 18%). Both are sizable 4% positions. Next, Kaufman upped his position MaxCyte
by 55% to 1.5% of the portfolio. The company offers a cell-engineering platform used by pharma companies to research therapies. He also started a new play on this theme — Stevanato
an equipment supplier based in Italy that came public in the U.S. in July.
True contrarians should be taking a close look at biotech right now. The SPDR S&P Biotech
exchange traded fund (ETF) is down over 12% this year and the iShares Biotechnology ETF
is up only 2%, compared with 27% gains for the S&P 500.
In biotech, Kaufman took on a new position in Natera
in genetic-testing diagnostics. It was his biggest position and a sizable bet, at 6% of the portfolio. He also added to his position in the antibody-therapeutics company Argenx
The position increased by 14% to 3.5% of the portfolio.
Among big-pharma names, Kaufman increased his positions in Abbott Laboratories
and Eli Lilly
by 33% and 72%. They are 1.8% and 2.5% positions.
Baron is a large fund group, which gives it the privilege of access to IPOs at the offering prices. With hot IPOs, this entry will typically be far below where the IPO trades on its first day. This puts individual investors at a disadvantage. One way to get around this is to be patient and wait for IPOs to fall below where they traded in the opening days. That’s the case with three IPOs that look interesting because they are held by the Baron Discovery Fund
They still trade above their offering prices, but they are all well below where you would have bought them in the opening days. They are: ForgeRock
in digital-identity management; Definitive Healthcare
in sales-management software; and Clearwater
in accounting software. Umansky took on a position in Toast
which sells software used in the restaurant sector.
In marijuana, the Baron Discovery Fund initiated a position in Hydrofarm
This is a pick-and-shovel play that sells lighting and irrigation equipment, nutrients and other products used to cultivate plants including cannabis.
One catch with all of these names is that we do not know what prices Baron funds bought them at. But a key tenet of the Baron approach is to invest for the long term. So I will assume Baron still likes these companies even if they may be up significantly from third-quarter prices. If that’s the case, one fix is to consider taking starter positions now and adding on weakness.
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned TSLA, GWRE and RRR. Brush has 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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