We remain committed to a “plain vanilla” strategy of investing for the long term in people who run businesses that we think have an opportunity to become much larger than they are at present.
We believe that the next several years offer better opportunities for stock pickers than have been available for many years.
Healthcare, education, infrastructure, domestic energy, consumer staples, business services, financial services and government services are among the areas where we currently find attractive investment opportunities. Many of these industries will benefit from government initiatives already in place.
We expect many of the financially strong businesses in which we have invested to earn more in 2009 than 2008 despite the difficult economic environment.
Ron Baron and his team run eight mutual funds and their 12 billion dollars are distributed among 229 stocks. On average, each stock is entitled to less than 0.5% of the assets. Yet, these five stocks has more than 2% each.
No. 1: DeVry Inc. (DV), Weighting: 2.95% - 7,074,185 Shares
DeVry Inc. owns and operates DeVry Institutes of Technology, Denver Technical College, Keller Graduate School of Management, and Becker Conviser CPA Review. Devry Inc. has a market cap of $3.74 billion; its shares were traded at around $52.28 with a P/E ratio of 22.6 and P/S ratio of 2.6. The dividend yield of Devry Inc. stocks is 0.3%. Devry Inc. had an annual average earning growth of 4.3% over the past 10 years.
Baron funds started to own DV in 4Q06. They owned 7.1 million shares as of 2Q09, increasing from 6.8 million shares from 1Q09.
No. 2: Strayer Education Inc. (STRA), Weighting: 2.47% - 1,356,575 Shares
STRAYER EDUCATION INC. is a regional proprietary institution of higher education offering undergraduate and graduate degree programs to more than 7000 students at eight campuses in Washington D.C. and Northern Virginia. Strayer Education Inc. has a market cap of $3.02 billion; its shares were traded at around $215.55 with a P/E ratio of 32.6 and P/S ratio of 7.6. The dividend yield of Strayer Education Inc. stocks is 0.9%. Strayer Education Inc. had an annual average earning growth of 19% over the past 10 years. GuruFocus rated Strayer Education Inc. the business predictability rank of 3-star.
Baron Funds started to own 1.43 million shares from 3Q06 and their ownership has changed slightly during past three years.
Commenting on Stayer Education, Baron and his team said in the quarterly report:
Strayer Education’s stock rallied on continued strong performance and diminishing concerns about the ultimate impact of regulatory changes on this well run company’s long-term growth prospects. Strayer’s 24% increase in summer enrollment was supported by a near-record 26% increase in new student enrollment and higher retention. Top-line outperformance has allowed the company to overcome the drag of new campus openings, which we believe are the primary driver of enrollment growth rather than counter-cyclicality. We believe Strayer, now with 46,000 students in 17 states, is well-positioned for multi-year growth as it pursues its strategy ofdeveloping a nationwide presence.
No. 3: Charles Schwab Corp. (SCHW), Weighting: 2.06% - 14,046,339 Shares
Charles Schwab Corp. provides a full-service brokerage company. Charles Schwab Corp. has a market cap of $20.56 billion; its shares were traded at around $17.73 with a P/E ratio of 19.8 and P/S ratio of 4. The dividend yield of Charles Schwab Corp. stocks is 1.3%. Charles Schwab Corp. had an annual average earning growth of 12.1% over the past 10 years.
Baron Funds started to own 15.6 million shares of SCHW from 3Q06 and still owned 14.0 million shares as of 2Q09.
Commenting on their investment in Charles Schwab, Baron and his team commented:
Charles Schwab’s shares benefited from an improving macroeconomic outlook during the second quarter. The idea that the economic recession was decelerating took hold and, we believe, contributed to the rise in the equity markets. Higher equity valuations increased the fee revenue Charles Schwab earned on customers’ investments in mutual funds. In addition, in late-May a consensus view developed that the government might raise the Fed Funds rate sooner than had previously been thought. This caused the-near term prospects for the net interest income that Charles Schwab earns on customer cash balances to improve. The company also reported first quarter earnings that exceeded expectations on impressive expense discipline. Lastly, the company continued to report solid monthly net new asset inflows from customers.
No. 4: Arch Capital Group Ltd. (ACGL), Weighting: 2.34% - 4,790,503 Shares
Arch Capital Group Ltd. is a diversified financial services holding company with an emphasis on the insurance sector. Arch Capital Group Ltd. has a market cap of $3.89 billion; its shares were traded at around $64.27 with a P/E ratio of 8.4 and P/S ratio of 1.3. Arch Capital Group Ltd. had an annual average earning growth of 48.9% over the past 10 years. GuruFocus rated Arch Capital Group Ltd. the business predictability rank of 3-star.
Baron Funds owned 4.8 million shares.
Baron Funds commented on their holding in Arch Capital:
We have continued to have significant investments in well capitalized financial businesses like property and casualty insurer Arch Capital. Arch was a bet several years ago on founder Dinos Iordanou that paid off, and is continuing to pay off. Arch is a beneficiary of the financial problems experienced by its largest competitor, AIG. Arch sells at about its stated book value and 7 times earnings.
No. 5: MSCI INC (MXB), Weighting: 2.04% - 10,008,578 Shares
MSCI Inc. is a leading provider of investment decision support tools to investment institutions worldwide. MSCI Inc. products include indices and portfolio analytics for use in managing equity fixed income and multi-asset class portfolios. Msci Inc has a market cap of $2.97 billion; its shares were traded at around $29.67 with a P/E ratio of 41.3 and P/S ratio of 6.9.
Baron Funds owned 10 million shares as of 2Q09.
Baron Funds commented on MSCI:
MSCI shares gained 45% in the second quarter, powered by the market’s recovery and continued solid retention rates in its core index license business. Despite some weakness in MSCI’s customer base, the core index license business continued to grow at a double-digit pace and generate retention rates in excess of 90%. We believe this demonstrates the long-term value of MSCI’s products and the significant pent-up demand that will return as discretionary budgets improve.
Strength in the index business was supplemented by the dramatic recovery in MSCI’s ETF-linked assets, which jumped from $108 billion to $176 billion due to the combination of better market performance and positive fund flows. Since MSCI receives an average fee of 3-4 basis points on its ETF-linked business and the marginal cost is close to zero, the appreciation in ETF assets falls almost directly to the company’s bottom line. We believe that ETFs are enjoying long-term secular growth due to their low-cost and high liquidity relative to traditional investment vehicles, and we expect both the number of ETFs and ETF assets under management to continue to grow 20-40% annually over the next several years.
The top five holdings of Baron Funds family go to two sectors: education and financial services. All five holdings are long term holdings and judged from their comments, they intend to keep these for a long time to come.
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