Baron Capital Management founder Ron Baron (Trades, Portfolio) manages several funds, including the Growth and Partners Funds. As discussed in its summary prospectus, the Baron Partners Fund seeks long-term capital appreciation through equity investments with significant growth opportunities, sustainable competitive advantages, good management and attractive valuations. The fund invests in company stocks using a bottom-up approach and a value-oriented discipline. During the third quarter, the Partners Fund increased its positions in Robert Half Financial Inc. (RHI, Financial), Netflix Inc. (NFLX, Financial), Alibaba Group Holding Ltd. (BABA, Financial), Baidu Inc. (BIDU, Financial) and Tesla Motors Inc. (TSLA, Financial).
Robert Half Financial
Baron’s Partners Fund increased its position in Robert Half Financial nearly sevenfold, purchasing 871,840 shares at an average price of $38.11.
The risk consulting services company has strong financial strength and profitability, implying good competitive advantage and high growth potential. Robert Half Financial has solid interest coverage and Altman Z-scores, and the company’s operating margin outperforms 84% of competitors. Additionally, the company’s margins and returns are near a 10-year high.
Even though the company reported slightly weaker earnings performance in third-quarter 2016 compared to third-quarter 2015, CEO Harold Messmer still acclaimed the company’s solid demand for their accounting and financial consulting services. Accountemps and Robert Half Management Resources, two of the company’s key staffing divisions, reported the highest year over year revenue gains. Robert Half Financial maintained a 33.48% return on equity as of the third quarter, outperforming 88% of global staffing and outsourcing companies.
Baron discussed his strong views about the financial consulting company in his third-quarter fund report. Robert Half Financial, according to Baron, presents an “attractive entry point” to the fund since the company has several unique competitive advantages, including best-in class management, strong market positioning and well-known brand name. Emphasis on small- and middle-market clients instead of the large institutions contributed to increasing company profit margins.
As the company exhibits high value potential, Chuck Royce (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) increased their Robert Half Financial positions 207.63% and 90.92% respectively. Royce owns the second-largest stake in RHI with 1,458,433 shares while Baron owns the third-largest stake with 1,016,792 shares.
Netflix
Baron increased his Netflix position 388.81% from the prior quarter, purchasing 243,309 shares at an average price of $95.45.
Unlike Robert Half Financial, Netflix has a modest financial strength rank of 5. The pay TV company has a weak Piotroski F-score of 2 and a poor Beneish M-score of -1.13. Netflix has five severe warning signs, including contracting operating and gross margins. The company’s operating margin is near a 10-year low and underperforms 61% of competitors.
Despite poor margins, Netflix reported strong revenue performance in the third-quarter. Quarterly net revenues exceeded $2 billion and increased 36% year over year, likely due to strong content slates from “Stranger Things” and “Narcos.” Constant-currency revenue growth year over year accelerated nearly 4% from the past two quarters.
Baron likely initiated a position in Netflix as the company offers leading on-demand media to subscribers in over 100 countries around the globe. Several video programming channels, including Comcast Corp. (CMCSA, Financial) and DISH Network Corp. (DISH, Financial), have began integrating Netflix to their platform. These integrations can increase Netflix subscribers, yielding higher profit margins. As the company offers good growth potential, George Soros (Trades, Portfolio) and John Griffin (Trades, Portfolio) invested in Netflix during the third quarter. The former took a 137,166 share stake while the latter expanded his stake 27.68%.
Alibaba and Baidu
Baron’s fund purchased 337,372 shares of Alibaba and 121,662 shares of Baidu. The two Chinese online media sites averaged $92.68 per share and $173.03 per share, respectively.
As discussed in a previous article, Alibaba maintained sustainable profitability during the third quarter as revenues increased 55%. Even though Baidu reported slightly lower revenues in the quarter, the Chinese online media company produced strong operational performance. Mobile search and Mobile maps monthly active users increased 3% and 7% year over year, respectively, while gross merchandise volumes increased 49% year over year. CEO Robin Li praised the company’s improvements to customer quality and increasing popularity of the Baidu news feed.
Both Alibaba and Baidu have a profitability rank of 8, although the former has a slightly stronger financial strength rank. Alibaba has a 28.32% operating margin and a 26.45% net margin, both outperforming over 97% of global specialty retail companies. Despite having a relatively lower operating margin, Baidu has net margin of 45.84%, which outperforms 97% of global Internet content % information companies.
Baidu has a 41.38% return on equity and a 21.71% return on assets, while Alibaba only has a 15.05% return on equity and an 8.57% return on assets. Additionally, Baidu’s returns outperform over 93% of competitors.
As both companies offer high value potential to shareholders, several gurus invested in Alibaba and Baidu. Based on consensus picks data, Alibaba had 16 guru buys and six guru sells in the past three months. On the other hand, Baidu had 13 guru buys and five guru sells during the respective period. Howard Marks (Trades, Portfolio) took a 560,148 share stake in Alibaba and an 8,214 share stake in Baidu.
Tesla
Baron increased his position in Tesla 7.70%, purchasing 111,256 shares at an average price of $216.58.
The electrical vehicle company has a poor financial strength rank of 4, likely due to modest Altman Z-scores and Beneish M-scores. The former suggests mild distress while the latter implies earnings manipulation. The company’s margins and returns severely underperform global auto manufacturers, with operating margins and returns on equity ranking lower than 92% and 97% of competitors.
Despite the poor financials, Tesla’s third-quarter earnings report suggests strong growth potential. The EV manufacturing company reported $22 million in net income and $176 million in free cash flow based on generally accepted accounting principles. Tesla significantly reduced its long-term debt and increased its GAAP gross profit per car from the second quarter to the third quarter. The latter likely occurred due to increased store efficiency and product enhancements.
On Nov. 17, unaffiliated shareholders of Tesla and SolarCity approved the merger between the two companies, and the merger should close within the next few days. Despite this, Tesla’s stock price dropped 1.28% from its previous close of $188.66, continuing its downward trend from the third quarter.
Baron discussed likely reasons for the decline in Tesla’s stock price, including market evaluation of the SolarCity merger and product investigation after a fatal incident involving Tesla’s autopilot system. However, the Baron Funds manager remains optimistic about the company: Tesla has a strong brand and brings substantial product innovation. The EV company received over 370,000 Model 3 reservations, representing the largest product launch in the company’s history.
The Baron funds manager has the largest stake in Tesla as of Sept. 30.
See also
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Disclosure: The author has no position in the companies mentioned in this article.
