Baron Funds recently released its 13F portfolio updates for the fourth quarter of 2022, which ended on Dec. 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 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 buys for the quarter were additions to Chart Industries Inc. (GTLS, Financial) and Toll Brothers Inc. (TOL, Financial), while its most notable sells were reductions to Spotify Technology SA (SPOT, Financial) and Amazon.com Inc. (AMZN, 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.
Chart Industries
Baron Funds upped its stake in Chart Industries (GTLS, Financial) by 127.28% for a total of 909,214 shares. At the quarter’s average share price of $160.62, the trade added 0.20% to the equity portfolio.
Chart Industries manufactures highly engineered equipment for multiple applications in the clean energy and industrial gas markets. From liquification equipment to carbon capture and hydrogen fueling stations, it plays a part in every phase of the liquid gas supply chain and parts of the carbon capture, utilization and storage chain.
The solid outlook for the clean energy and carbon mitigation industries has resulted in positive analyst outlooks; for example, Morningstar (MORN, Financial) calls for a three-to-five-year revenue growth rate of 17.52%, which would be an acceleration from the past three-year revenue growth rate of 0.9%.
Toll Brothers
The firm also more than doubled its investment in Toll Brothers (TOL, Financial), adding another 128.41% for a total holding of 1,264,403 shares. The trade had a 0.12% impact on the equity portfolio. During the quarter, shares traded for an average price of $45.99.
Toll Brothers designs, builds, markets, sells and helps finance both residential and commercial properties in the United States, with a focus on the luxury market. It primarily builds on the east and west coasts of the U.S. and also offers luxury rental properties.
This company has recently begun to feel the pain of the housing boom slowing down due to the combination of higher interest rates and persistently high prices. However, it remains confident that its luxury focus will protect it somewhat from the pain of lower-cost homebuilders, since most of its customers are move-up buyers that are typically looking above the $1 million mark. The company’s return on invested capital is higher than its weighted average cost of capital as of this writing, showing value creation.
Spotify Technology
The firm slashed its Spotify Technology (SPOT, Financial) holding by 79.92% for a remaining stake of 352,982 shares, trimming 0.39% off the equity portfolio. Shares averaged $80.65 apiece during the quarter.
Spotify is a Swedish technology company that offers music streaming services worldwide. It offers both subscription-based ad-free streaming and free ad-supported streaming.
Spotify used to have a kind of duopoly in the mainstream music streaming app market alongside Pandora, but these two have seen their market share chipped away in recent years by competitors such as Apple (AAPL, Financial) Music, which offers better streaming quality, and Amazon (AMZN, Financial) Prime Music, which comes with a Prime membership at no additional cost and is thus the go-to choice for Prime members. In light of this, it is hard to justify the lack of profitability.
Amazon.com
Baron Funds cut its stake of Amazon.com Inc. (AMZN, Financial) by 33.54% for a remaining holding of 955,485 shares, trimming 0.17% of the equity portfolio at the quarter’s average share price of $98.78.
A leader in U.S. e-commerce and cloud services, Amazon is still one of the most valuable publicly traded companies in the world, though its market cap has fallen out of the trillion-dollar club to $996.03 billion. Its low-margin e-commerce business is struggling with inflation, but the cloud business is still showing strong growth.
Given Amazon’s dominant market position in both of its main areas of operation, it is rare for it to see a significant drop in its share price, but that is exactly what has happened ever since the Covid market bubble popped. Amazon stock is now considered a possible value trap by the GF Value chart because its share price has fallen so far below the model’s estimate of fair value.
See also
Other notable trades for the quarter included a slight reduction to one of the firm’s top holdings Gartner Inc. (IT, Financial) and a new position in Sherwin-Williams Co. (SHW, Financial).
As of the quarter’s end, Baron Funds held shares in 375 stocks in an equity portfolio valued at $29.78 billion based on the 13F filing. The turnover for the quarter was 2%. The top holdings were Tesla Inc. (TSLA, Financial) with 7.25% of the equity portfolio, Gartner with 5.53% and CoStar Group Inc. (CSGP, Financial) with 4.96%.
By sector, the firm’s portfolio had the highest weightings in consumer cyclical, financial services and technology stocks.
