Baron Funds, where Ron Baron (Trades, Portfolio) is CEO and chief investing officer, invests in companies with open-ended growth and defensive opportunities. During the past few days, the guru reduced his position in Inovalon Holdings Inc. (INOV, Financial) and Moelis & Co. (MC, Financial) as the companies have poor business outlooks.
Inovalon
Baron chopped 61.13% of his stake in Inovalon, selling 7,757,983 shares at $10.3 per share. Based on GuruFocus estimates, the portfolio manager lost about 56% on the stock.
Inovalon provides leading cloud-based analytics and data-driven platforms to health care companies. Although the company has a profitability rank of 6, Inovalon’s operating margin and return on equity are both near 10-year lows. Additionally, the company’s interest coverage of 13.32 underperforms 76% of global health information services companies.
Inovalon’s profitability outlook declined as third-quarter 2016 net incomes underperformed third-quarter 2015 net incomes by about $2.3 million. The company’s adjusted EBITDA dropped $2.7 million, resulting in a margin decline of 2.5% from the prior-year quarter. Inovalon’s financial outlook further weakened when the company lowered its full-year 2016 revenue and net income guidance by about $26 billion after failing to enter a “multiyear collaboration agreement” to recognize significant revenue during fourth-quarter 2016.
Moelis
The Baron Funds manager trimmed 25.56% of his stake in Moelis, selling 651,062 shares at $33.9 per share. Baron realized a gain of roughly 8% from the stock.
While Moelis has a strong financial strength rank of 9, the independent investment bank has modest profitability and growth. As of Jan. 11, the company’s operating margin of 24.51% underperforms 62% of global asset management companies.
Moelis currently has five medium warning signs, including declining per-share revenues and high dividend payout. These two warning signs suggest that the investment bank’s dividend is likely unsustainable and may result in lower future dividends.
On Dec. 13, 2016, the asset management company declared a special dividend of $1.25 per share payable Jan. 5. About three weeks later, Moelis increased its quarterly dividend on its Class A common stock by 5 cents per share. These dividend declarations contributed to a dividend payout ratio of 0.83 as of Jan. 11, a 10-year high. If the company’s profitability outlook weakens and has to cut its dividend, Moelis’ stock price, which is already near a three-year high, will likely crash. The company’s price-sales (P/S) ratio is also near a three-year high.
See also
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Disclosure: I do not have any position in the stocks mentioned in the article.
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