Baron Funds recently released its portfolio updates for the first quarter of 2020, which ended on March 31.
Founded by Ron Baron (Trades, Portfolio) in 1982, Baron Funds is a long-term asset management firm that invests in well-researched value opportunities led by quality management teams. The firm seeks to ignore short-term market fluctuations as long as they do not change a companys fundamentals. Baron manages the Growth and Partners funds and co-manages the Asset Fund, with a preference for small and mid-cap companies that demonstrate strong competitive advantages and growth prospects.
Based on its investing criteria, the firm made 20 new common stock investments during the quarter, sold out of 36 stocks and made several additions and reductions to existing positions, resulting in a turnover rate of 4%. The most significant trades were the sales of Petroleo Brasileiro SA Petrobras (PBS) and IAC/InterActiveCorp (IAC, Financial) and the buys of GDS Holdings Ltd (GDS, Financial) and Schrodinger Inc. (SDGR, Financial).
Petroleo Brasileiro SA Petrobras
The firm sold out of all 8,117,525 of its shares of Petroleo Brasileiro SA Petrobras, impacting the equity portfolio by -0.49%. During the quarter, shares traded for an average price of $12.09.
Petroleo Brasileiro is a semi-public Brazilian petroleum company, 64% of which is owned by the Brazilian government. Commonly known as Petrobras, the company explores for, extracts, refines, markets and supplies oil and natural gas products.
On May 18, shares of Petroleo Brasileiro traded around $6.81 for a market cap of $43.96 billion and a price-earnings ratio of 9.55. The price-book ratio of 0.86 and price-sales ratio of 1.01 indicate a low market valuation.
GuruFocus gives the company a financial strength rating of 3 out of 10 and a profitability rating of 6 out of 10. The Altman Z-Score of 0.65 suggests that the company has a risk of going bankrupt, but the interest coverage ratio of 2.62 indicates that it can likely make interest payments. The operating margin of 25.2% is higher than 82.81% of competitors, but the weighted average cost of capital is higher than the return on invested capital, which indicates low profitability.
The firm also sold out of its 304,591-share position in IAC/InterActiveCorp, which had a -0.29% impact on the equity portfolio. Shares traded for an average price of $223.11 during the quarter.
IAC is a holding company that owns mostly media and Internet assets across 100 countries. Based in New York City, IAC is one of the largest website holding companies in the world with over 150 brands, including Investopedia, HomeAdvisor, RoboKiller and Match Group.
On May 18, shares of IAC traded around $253.43 for a market cap of $21.51 billion and a price-earnings ratio of 230.17. The Peter Lynch chart indicates that the stock is trading above its intrinsic value.
GuruFocus gives the company a financial strength rating of 5 out of 10 and a profitability rating of 8 out of 10. The Altman Z-Score of 3.76 means that the company is not in danger of bankruptcy, but the cash-debt ratio of 0.8 is lower than 77.03% of competitors. The ROIC of 15.27% is higher than the WACC of 7.2%, indicating profitability, and both revenue and net income have increased in recent years.
The firm added 797,268 shares to its investment in GDS Holdings, increasing the stake by 24.54% to a total of 4,046,496 shares. The trade had a 0.23% impact on the equity portfolio. During the quarter, shares traded for an average price of $55.74.
GDS Holdings develops and operates high-performance data centers in Tier 1 Chinese cities. The company offers colocation and managed services such as direct private connection to major public cloud platforms, which provides a significant runway for growth as cloud adoption is still in its early stages in China.
On May 18, shares of GDS Holdings traded around $61.19 for a market cap of $9.26 billion. Revenue has been steadily increasing in recent years, though the company had yet to earn a net profit.
GuruFocus gives the company a financial strength rating of 4 out of 10 and a profitability rating of 4 out of 10. The cash-debt ratio of 0.37 is lower than 80.63% of competitors, but the Altman Z-Score of 2.15 indicates that the company is not likely to go bankrupt. WACC of 9.11% exceeds ROIC of 2.3%, indicating low profitability. The operating margin has entered the positive range at 11.88%, though the net margin is still in the negatives at -10.72%.
The firms biggest new buy of the quarter was for 950,014 shares of Schrodinger, which had a 0.20% impact on the equity portfolio. The firm participated in the companys initial public offering. Shares traded for an average price of $37.48 during the quarter.
Schrodinger is a life and materials sciences software company that develops chemical simulation software used in pharmaceutical, biotech and materials research. Its physics-based computational drug discovery platform can predict binding affinity with a high degree of accuracy, enabling faster and more cost-effective drug discovery. Founded in 1990 and headquartered in New York City, the company went public in February of 2020.
On May 18, shares of Schrodinger traded around $59.49 for a market cap of $3.77 billion. The copys IPO was on Feb. 5, with shares offered at $17 apiece. Since the IPO, shares have gained 249.94%.
GuruFocus gives the company a financial strength rating of 7 out of 10 and a profitability rating of 1 out of 10, though as a company that recently IPOd, there is a substantial lack of information about the stock. The cash-debt ratio of 19.24 is higher than 84.90% of competitors, but the operating margin of -39.43% indicates that the company is not yet profitable.
As of the quarters end, the firm held shares in 338 stocks valued at a total of $20.41 billion. The top holdings were CoStar Group Inc. (CSGP) with 6.04% of the equity portfolio, IDEXX Laboratories Inc. (IDXX) with 4.20% and Tesla Inc. (TSLA) with 4.15%.
In terms of sector weighting, the firm was most invested in technology, consumer cyclical and financial services.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Portfolio updates reflect only common stock positions as per the regulatory filings for the quarter in question and may not include changes made after the quarter ended.
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