Baron Funds recently released its 13F portfolio updates for the third quarter of 2021, which ended on Sept. 30.
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 buys for the quarter were SmartRent Inc. (SMRT, Financial) and Spotify Technology SA (SPOT, Financial), while its biggest sells were GDS Holdings Ltd. (GDS, Financial) and Itau Unibanco Holding SA (ITUB, Financial).
The firm established a new holding worth 11,647,629 shares in SmartRent (SMRT, Financial). With shares trading around $12.40 apiece during the quarter, the stock has a 0.34% weight in the equity portfolio.
Based in Scottsdale, Arizona, SmartRent is a provider of smart home solutions for landlords. In addition to providing hardware and software that enables IoT connected devices to operate in residential properties, it also offers digital tour and property management software.
On Nov. 19, shares of SmartRent traded around $10.09 for a market cap of $1.96 billion. Since going public near the end of August, the stock is down 15%.
Following its successful public debut, the company has a cash-debt ratio of 115.61 and a current ratio of 9.05. The operating margin and net margin are both still in the negatives, meaning the company is not yet profitable.
Baron Funds invested in another 535,342 shares of Spotify Technology (SPOT, Financial), bringing the total shares owned up to 1,017,115 and impacting the equity portfolio by 0.27%. Shares traded for an average price of $236.42 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.
Shares of Spotify traded around $259.55 on Nov. 19 for a market cap of $49.72 billion. The GuruFocus Value chart rates the stock as fairly valued.
The company has a financial strength rating of 5 out of 10 on the back of a Piotroski F-Score of 6 out of 9 and an Altman Z-Score of 6.23, both of which indicate financial stability. The profitability rating is 4 out of 10. The three-year revenue per share growth rate is 23.4%, while the three-year Ebitda per share growth rate is 23.3%.
Baron Funds cut its GDS Holdings (GDS, Financial) stake by 2,330,416 shares, leaving a remaining holding of 2,354,546 shares. The trade had a -0.42% impact on the equity portfolio. Shares traded around $61.86 each in the three months through September.
GDS Holdings is a Chinese colocation and managed services provider. It offers direct private connection to public clouds, a service platform for managing hybrid clouds and the resale of public cloud services. It also provides outsourced data center services.
On Nov. 19, shares of GDS Holdings traded around $55.02 for a market cap of $10.66 billion. According to the GF Value chart, the stock is a possible value trap, since the price is so far below the intrinsic value estimate.
The company has a financial strength rating of 3 out of 10 and a profitability rating of 4 out of 10. The cash-debt ratio of 0.42 and interest coverage ratio of 0.39 show the company is at risk of bankruptcy. The return on invested capital is consistently lower than the weighted average cost of capital, so the company is not creating value as it grows.
Itau Unibanco Holding
The firm sold out of its 19,066,690-share investment in Itau Unibanco Holding (ITUB, Financial), impacting the equity portfolio by -0.26%. During the quarter, shares were changing hands for an average price of $4.64.
Itau Unibanco is the largest banking institution in Brazil, formed from the 2008 merger of Banco Itau and Unibanco.
Shares of Itau Unibanco traded around $3.93 on Nov. 19 for a market cap of $37.35 billion. The GF Value chart rates the stock as modestly undervalued.
The company has a financial strength rating of 3 out of 10, with the high Piotroski F-Score of 7 out of 9 contrasting with the low cash-debt ratio of 0.63. The profitability rating is 5 out of 10. The return on equity is beating 91% of industry peers, while the return on assets is outperforming 78% of other companies in the banks industry.
As of the quarter’s end, Baron Funds held shares in 397 stocks in an equity portfolio valued at $44.15 billion, based on the 13F filing. The turnover for the quarter was 5%.
The top holdings were Tesla Inc. (TSLA, Financial) with 10.57% of the equity portfolio, Gartner Inc. (IT, Financial) with 3.76% and IDEXX Laboratories Inc. (IDXX, Financial) with 3.65%.
By sector, the firm’s portfolio had the highest weightings in consumer cyclical, technology and health care.