Ron Baron (Trades, Portfolio), leader of Baron Capital Management, disclosed earlier this week his firm expanded its stake in Afya Ltd. (AFYA, Financial) by 3.75% while curbing its investment in Manchester United PLC (MANU, Financial) by 42.82%.
The guru’s New York-based firm implements a bottom-up research process to find small and mid-size growth companies with open-ended opportunities and significant competitive advantages to invest in for the long term while they are trading at attractive prices. Baron, who manages the Baron Asset Fund, the Baron Growth Fund and Baron Partners Fund, is also known for ignoring short-term market fluctuations, especially when he believes the fundamental reasons for purchasing the stock have not changed.
According to GuruFocus Real-Time Picks, a Premium feature based on 13D and 13G filings, both transactions occurred on March 31.
Afya
The firm invested in 164,013 shares of Afya (AFYA, Financial), impacting the equity portfolio by 0.01%. The stock traded for an average price of $14.41 per share on the day of the transaction.
Baron’s firm now holds 4.5 million shares total, accounting for 0.14% of the equity portfolio. GuruFocus estimates the firm has lost 33.43% on the investment since establishing it in the third quarter of 2019.
The Brazilian company, which provides medical education courses in a variety of fields as well as digital health services, has a $1.39 billion market cap; its shares were trading around $15.03 on Friday with a price-earnings ratio of 33.21, a price-book ratio of 2.52 and a price-sales ratio of 4.23.
The Peter Lynch chart suggests the stock is overvalued since it is trading above its intrinsic value.
Additionally, its GF Score is a low 27 out of 100, receiving only middling ranks for financial strength and profitability.
On March 31, the company reported its fourth-quarter and full-year 2021 financial results. It posted 45.3% year-over-year growth in adjusted net revenue to 505.4 million Brazilian reals ($106.3 million) for the three months ended Dec. 31. Adjusted net income was down 2.4% from the prior-year quarter at 98.5 million reals.
For the full year, Afya recorded a 45.1% increase in revenue from 2020 to 1.7 billion reals. Net income of 440.4 million reals grew 0.7%.
Afya’s financial strength and profitability were both rated 5 out of 10 by GuruFocus. In addition to poor interest coverage, the Altman Z-Score of 2.06 indicates the company is under some pressure. The return on invested capital, however, eclipses the weighted average cost of capital, meaning value is being created as the company grows.
The company is also being supported by margins and return on equity, assets and capital that outperform over half of its competitors. Afya’s moderate Piotroski F-Score of 5 out of 9 indicates operations are typical for a stable company.
Baron remains Afya’s largest guru shareholder with a 4.93% stake. Howard Marks (Trades, Portfolio)’ Oaktree Capital and Jim Simons (Trades, Portfolio)’ Renaissance Technologies also have positions in the stock.
Manchester United
With an impact of -0.13% on the equity portfolio, Baron’s firm sold 4.18 million shares of Manchester United (MANU, Financial). Shares traded for an average price of $14.47 each on the day of the transaction.
The firm now holds 5.58 million shares total, which represent 0.17% of the equity portfolio. GuruFocus data shows Baron has lost 2.05% on the investment since establishing it in the fourth quarter of 2012.
The U.K.-based company, which operates a professional soccer club of the same name along with its related ancillary activities, has a market cap of $2.39 billion; its shares were trading around $14.69 on Friday with a price-book ratio of 7.3 and a price-sales ratio of 3.35.
The GF Value Line shows the stock is modestly undervalued currently based on its historical ratios, past financial performance and future earnings projections.
Additionally, its GF Score if moderate at 66 out of 100, receiving a high rank for GF Value, middling ranks for profitability and financial strength and low ranks for momentum and growth.
In his fourth-quarter 2021 shareholder letter, Baron noted the company’s shares declined following “lackluster match performance.”
“Management announced plans to change the coaching structure to better develop the team,” he wrote. “With the stadium at full capacity and Cristiano on the roster, we view Manchester United as a unique media company with over 1.1 billion fans globally and broad appeal that should compound value.”
GuruFocus rated Manchester United’s financial strength 4 out of 10. In addition to debt-related ratios that are underperforming versus other media players, the low Altman Z-Score of 0.95 warns the company could be at risk of bankruptcy if it does not improve its liquidity position.
The company’s profitability fared a bit better with a 5 out of 10 rating, though its margins and returns are negative and underperform a majority of industry peers. Manchester United is also supported by a moderate Piotroski F-Score of 5, but the predictability rank of one out of five is on watch as a result of declining revenue per share. GuruFocus found companies with this rank return an average of 1.1% annually over a 10-year period.
John Rogers (Trades, Portfolio) is the company’s largest guru shareholder with a 6.71% stake. Simons’ firm also has a position in Manchester United.
Portfolio composition and performance
Baron’s $47.14 billion equity portfolio, which was composed of 404 stocks as of Dec. 31, is most heavily invested in the consumer cyclical, technology and financial services sectors.
As of the end of the fourth quarter, the guru’s five largest holdings were Tesla Inc. (TSLA, Financial), Gartner Inc. (IT, Financial), IDEXX Laboratories Inc. (IDXX, Financial), CoStar Group Inc. (CSGP, Financial) and Vail Resorts Inc. (MTN, Financial).
According to its website, the Baron Partners Fund returned 31.73% in 2021, outperforming the S&P 500’s return of 28.7%.
