Ron Baron (Trades, Portfolio), founder of Baron Asset Management and co-portfolio manager of the Baron Partners Fund, invests in companies using a long-term investing approach.
The fund seeks capital appreciation through focused research on the company’s management and long-term growth opportunities. During the second quarter, Baron took stakes in Under Armour Inc. (UA.C, Financial), Red Rock Resorts Inc. (RRR, Financial) and MGM Growth Properties LLC (MGP, Financial). Additionally, the fund manager increased his position in Gaming and Leisure Properties Inc. (GLPI, Financial).
Under Armor
Baron purchased 5,113,695 new shares of Under Armour Class C at an average price of $37.40 per share. As mentioned in his shareholder letter, the fund manager sees growth potential in Under Armour due to its strong brand and innovation ability. With this transaction, the fund manager increased his portfolio by 0.99%.
Even though the company currently has a poor Piotroski F-score, Under Armour still has high financial strength and profitability. During the past 10 years, Under Armour seldom experienced financial distress: the company’s Altman Z-scores generally ranged between 7.5 and 27.07.
Additionally, the apparel manufacturing company has a five-star predictability rank, implying strong and predictable revenue and earnings. The company’s three-year revenue growth rate outperforms 96% of global apparel manufacturing companies.
As the company’s financial outlook strengthens, many gurus purchased shares in Under Armour Class C. Frank Sands (Trades, Portfolio), CEO of Sands Capital Management, invested 8,480,965 shares, the highest single purchase of UA.C among the gurus.
Despite holding over 7 million shares, Baron trimmed 28.9% of his Under Armour Class A position, likely due to low earnings per share.
The management of Under Armour discussed the low EPS in its recent quarterly report filing with the Securities and Exchange Commission. During the second quarter, the board of directors approved the issuance of Class C stock with a $59 million dividend, resulting in a net loss of $52.656 million to all shareholders and a net loss per share of 12 cents to Class A and Class B shareholders.
Baron’s other major trades
The Baron Partners Fund manager purchased 3,605,208 shares of Red Rock Resorts and 2,373,714 shares of MGM Growth Properties LLC. The two companies averaged $20.38 per share and $23.76 per share. Although Red Rock Resorts has high operating margins and returns on equity, the gaming resort company has a modest business operation with a financial strength rating of just 4 out of 10. With interest coverage of just 2.17, underperforming 82% of global resorts and casinos, Red Rock Resorts is moderately burdened with debt.
As discussed in his shareholder letter, Baron invested in MGM Growth Properties due to its high-quality portfolio of assets. Even though the company has poor financial strength and profitability, the triple-net REIT has high growth expectations within the next five years. Based on its high-quality portfolio of assets, which includes seven premiere Las Vegas properties, MGM Growth Properties can potentially double its cash flows in the next few years, creating high potential for revenue and EPS growth.
Among his top 10 holdings, Baron increased his Gaming and Leisure Properties position by 0.65%, adding 3,546,788 shares at an average price of $33.15. With this transaction, the fund manager has 14,633,364 shares of GLPI, representing 7.13% of shares outstanding.
Although its return on equity outperforms 99% of global diversified REITs, Gaming and Leisure Properties has a relatively weak business operation. Based on its Altman Z-score, the company experiences moderate to severe distress. Since 2014, the REIT’s Z-score peaked near 0.9.
To make matters worse, the self-managed REIT also has a Beneish M-score of 3.41. The higher the M-score, the more likely that the company manipulated its earnings –Â i.e., the company’s earnings may be overstated and inaccurate.
See also
Baron’s investment strategy shares common characteristics with that of David Rolfe (Trades, Portfolio), who creates long-term value through “index investing.” As mentioned in a previous article, Rolfe targets companies with sustainable revenue and earnings growth, a strong management team and high profitability levels. Baron, despite not using an “index investing” approach per se, still invests in companies with a long-term approach. As mentioned in his shareholder letter, the manager of Baron Partners Fund targets companies with high competitive advantage and sustainability, and are trading at attractive prices. The Buffett-Munger Screener, one of GuruFocus’ most powerful value screeners, best follows Baron’s investment strategy.
You can always create your own value screeners using the All-in-One Guru Screener, which contains over 150 different filters. Additionally, the screener allows you to create your own filters with the “Customized” tab, and backtest the filters using a model portfolio.
Disclosure: The author has no position in any of the stocks listed in this article.
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