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Margaret Moran
Margaret Moran
Articles (326) 

Top 3 New Buys of Ron Baron's Firm

Baron Funds invests in technology and construction during the 2nd quarter

August 17, 2020 | About:

Baron Funds recently released its portfolio updates for the second quarter of 2020, which ended on June 30.

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 company's fundamentals. Baron manages the Growth and Partners funds and co-manages the Asset Fund, with a preference for small and mid-cap companies that might be struggling now, but which demonstrate strong competitive advantages and growth prospects.

Based on its investing criteria, the firm's top new holdings established during the quarter were ZoomInfo Technologies Inc. (NASDAQ:ZI), Collier Creek Holdings (CCH) and The AZEK Co Inc. (NYSE:AZEK).

ZoomInfo Technologies

Baron Funds invested in 3,202,391 shares of ZoomInfo Technologies, impacting the equity portfolio by 0.59%. During the quarter, shares traded for an average price of $47.80.

Headquartered in Vancouver, Washington, ZoomInfo Technologies is a global provider of marketing solutions. The subscription-based software as a service (SaaS) company sells access to its database for sales, marketing and recruiting purposes.

On Aug. 17, shares of ZoomInfo traded around $39.46 for a market cap of $15.46 billion. GuruFocus gives the company a financial strength rating of 2 out of 10 and a profitability rating of 3 out of 10.

The cash-debt ratio of 0.03 is lower than 97.52% of competitors, while the interest coverage ratio of 0.5 and the current ratio of 0.61 indicate the company will need to secure additional funding in order to avoid bankruptcy.

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Since its initial public offering of $21 per share on June 4, the stock has gained 88%. The operating margin of 17.63% is a positive sign, beating 86.98% of other software companies, but the net margin of -15.75% shows the company still has a ways to go before it becomes profitable.

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Collier Creek Holdings

The firm established a new holding of 4,300,000 shares in Collier Creek Holdings, which had a 0.21% impact on the equity portfolio. Shares traded for an average price of $11.37 during the quarter.

Collier Creek Holdings is a special purpose acquisition company, meaning it was formed specifically to buy other businesses. The SPAC announced on June 5 that it has entered a definitive agreement to combine with private company Utz Quality Foods to form Utz Brands, which will be a pure-play snack food brand operating in the U.S.

On Aug. 17, shares of Collier Creek traded around $13.70 for a market cap of $765.49 million. GuruFocus gives the company a financial strength rating of 7 out of 10 and a profitability rating of 2 out of 10.

The company currently has no debt and $585 million in cash and equivalents, which is unsurprising for a SPAC that has yet to fulfill its purpose (the industry median cash-debt ratio stands at 37.09).

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The real profitability statistics for the company lie with its acquisition-to-be, Utz, which it is on track to acquire by the end of the third quarter. For the three months ended June 28, Utz reported pro forma net sales of $242 million, an 11% increase over the prior-year quarter's earnings of $218 million. Adjusted Ebitda of $33 million represented a 15% increase over the prior-year quarter's $29 million.

Using the pro forma results and the current share count of 55.88 million, net sales per share came in at $4.33 for the second quarter. Of course, the share count will almost certainly go up in the future. Additionally, pro forma results are subject to accounting acrobatics; most investors will not see the full earnings results until after Collier Creek takes the company public.

AZEK

The firm also invested in 1,486,355 shares of The AZEK Co Inc., impacting the equity portfolio by 0.17%. During the quarter, shares traded for an average price of $30.39.

AZEK is a designer and builder of outdoor living products such as decks, rails, trim and accessories. It utilizes materials sciences to create beautiful, sustainable, wood-free and low-maintenance building products. The Chicago-based company operates primarily in Illinois.

On Aug. 17, shares of AZEK traded around $38.86 for a market cap of $6.06 billion. GuruFocus gives the company a financial strength rating of 3 out of 10 and a profitability rating of 2 out of 10.

With a cash-debt ratio of 0.42, an Altman Z-Score of 5.66, an interest coverage ratio of 0.63 and a current ratio of 4.06, it is clear that the company has overall good balance sheet health, but its operating income is low compared to the interest expenses on its debt.

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Since its initial public offering of $23 per share on June 12, the stock has gained 69%. With an operating margin of 6.41% and a net margin of -9.11%, the company is still firmly in a cash-burning situation.

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Portfolio overview

As of the quarter's end, Baron Funds held shares in 343 stocks valued at a total of $27.66 billion. The firm made 29 new common stock investments during the quarter, sold out of 24 stocks and made several additions and reductions to existing positions, resulting in a turnover rate of 6%.

The top holdings were Tesla Inc. (TSLA) with 6.31% of the equity portfolio, CoStar Group Inc. (CSGP) with 5.40% and IDEXX Laboratories Inc. (IDXX) with 4.10%. In terms of sector weighting, the firm was most invested in technology, consumer cyclical and health care.

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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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