Baron Funds recently released its 13F portfolio updates for the third quarter of 2022, which ended on Sept. 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 latest 13F filing, the firm’s top buy for the third quarter was health care apparel company Figs Inc. (FIGS, Financial). According to GuruFocus Real-Time Picks, a Premium feature, the guru was also buying more shares of this stock on Oct. 31.
Baron’s other notable trades for the quarter included a new buy of Smartsheet Inc. (SMAR, Financial) and reductions to Alphabet Inc.’s (GOOG, Financial) non-voting shares and Pegasystems Inc. (PEGA, Financial).
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Figs
Baron’s firm bought 13,316,794 shares of Figs (FIGS, Financial) in the third quarter, when shares traded for an average price of $10.64, then added 370,996 more shares on Oct. 31 when the stock was trading around $7.38 per share. The holding now represents 0.38% of Baron Funds’ equity portfolio and 9.73% of Figs’ total shares outstanding.
Figs is a California-based health care apparel brand that sells comfortable designer scrubs and other medical apparel such as jackets, socks and scrub caps. In an interview with CNBC in August, Baron called Figs the “Lululemon (LULU, Financial) of health care,” which seems to be an accurate comparison when we consider that Figs’ competitive moat mainly relies on premium but affordable quality and strong branding.
As of Nov. 15, shares of Figs traded around $6.64 for a market cap of $1.11 billion and a price-earnings ratio of 37.19. The stock is down 77% since it went public in May 2021.
Since it went public so recently, it still has a strong balance sheet with a cash-debt ratio of 7.82 and an Altman Z-Score of 9.49. This strong balance sheet has a good chance of sticking around given that this is a rare company that is already profitable shortly after hitting the public markets. The operating margin of 8.72% and net margin of 3.14% are both strong.
Smartsheet
The firm’s top new buy for the quarter was Smartsheet (SMAR, Financial). It initiated a position worth 515,743 shares, taking up 0.06% of the equity portfolio. During the quarter, shares traded for an average price of $33.88 apiece.
Smartsheet is the developer of its namesake application that provides a project and work management platform. It seamlessly integrates views, workflows, reports and dashboards to capture and track plans, resources and schedules for optimal performance on both the project and business levels. Competition in this space is fierce, but many customers report notable increases in productivity thanks to the use of Smartsheet. It basically functions as a superior version of Excel but in the Cloud and with a superior user interface.
On Tuesday, shares of Smartsheet changed hands for around $32.42 for a market cap of $4.22 billion. The company is not currently profitable, but its price-sales ratio of 6.29 is less than half of its historical median. The GF Value chart rates the stock as a potential value trap due to the combination of the share price declines and lack of profitability.
The company is currently focusing on growth over profitability, which has caused its revenue and earnings per share growth numbers to move in opposite directions. According to estimates from Morningstar analysts, the company is not expected to be profitable until at least calendar year 2025.
Alphabet
The firm trimmed its stake in Alphabet’s (GOOG, Financial) non-voting shares by 538,881, bringing the remaining investment down to 844,139 shares and reducing the equity portfolio by 0.19%. The stock was changing hands for an average price of $111.66 per share during the quarter.
Based in Mountain View, California, Alphabet is a multinational conglomerate that was formed as part of a restructuring of Google in 2015, in which Alphabet became the parent company of Google and several former Google subsidiaries. Alphabet’s Google continues to be the world’s leading search engine by a long shot, and its Maps application is also widely utilized, both of which bring in hefty advertising revenues. Despite its business strengths, the stock is often sold to make room for other positions as wariness grows over how long the company can keep its spot as top dog of the internet.
Alphabet traded around $97.95 per share on Nov. 15 for a market cap of $1.26 trillion and a price-earnings ratio of 19.42. The GF Value chart rates the stock as significantly undervalued.
Despite many years of growth, Alphabet is not slowing down just yet, as shown by the three-year revenue per share growth rate of 25% and the three-year earnings per share without non-recurring items growth rate of 36.9%.
Pegasystems
Baron Funds slashed its Pegasystems (PEGA, Financial) holding by 782,457 shares for a remaining position of 165,667 shares. At the quarter’s average share price of $40.66, this took off 0.12% of equity portfolio weight.
Pegasystems is a Massachusetts-based company that develops software for customer relationship management and business process management. It offers a low-code platform powered by artificial intelligence to help customers with everything from personalizing engagement to automating service to streamlining operations. Unfortunately, this past May, a court found Pegasystems guilty of hiring someone to work at and steal trade secrets from rival Appian (APPN, Financial), and many analysts are betting that this blow will prove dire.
On Tuesday, shares of Pegasystems traded around $38.17 for a market cap of $3.14 billion. The company is currently unprofitable, though the price-sales ratio of 2.52 is below the company’s historical median. The GF Value chart rates the stock as a value trap due to the declining share price, poor financial strength and unprofitability.
The company’s operating and net margins have dropped in recent quarters, which could spell trouble and is not encouraging given that Pegasystems has been profitable in seven out of the past 10 years. This indicates that the historical profitability situation has changed for the worse.
See also
As of the quarter’s end, Baron Funds held shares in 371 stocks in an equity portfolio valued at $31.14 billion based on the 13F filing. The turnover for the quarter was 5%.
The top holdings were Tesla Inc. (TSLA, Financial) with 12.56% of the equity portfolio, Gartner Inc. (IT, Financial) with 4.02% and CoStar Group Inc. (CSGP, Financial) with 3.73%.
By sector, the firm’s portfolio had the highest weightings in consumer cyclical, technology and financial services stocks.
