December 4, 2022

Institutional investors are making withdrawals from the shares. They generated sales worth $42 billion in the five weeks ending September 21.

S&P Global Market Intelligence says it followed $51 billion in sales during the five weeks ended Sept. 7 — the biggest sales wave of the year. Bank of America customers supported defensive names on the cyclical last week, another nice contrasting sign telling us it’s time to go bullish and buy.

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“It’s a good buying opportunity,” says David Baron of the Barron Focused Growth Fund BFGFX.
+2.17%,
“Even if there’s a recession next year, a lot of stocks are priced in pretty hard earnings.”

No one knows for sure what the future will bring. But Baron deserves a listen, given his record. According to Morningstar Direct, their fund has outperformed its mid-cap growth category and the Morningstar US Mid-Cap Broad Growth Index by 14 percentage points over the past five years. This is a huge outperformance.

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The catch is that this could be a stock picker’s market.

“Not everything is going to work together,” Baron says.

Here are three ways to deal with it.

1. You can solve this problem by leaving the driving to someone else like Baron. His fund gets the most five stars from Morningstar, and it charges 1.3% in expenses.

2. You can take a peek inside their portfolio for stock ideas. “A recession doesn’t change our thesis on our stocks. “Our companies are constantly innovating and growing,” says Baron.

3. Better yet, take a “food for a lifetime” approach and consider what you can learn from them about investing.

I tackled the last two perspectives in a recent conversation with Baron about his investing outlook and his biggest — and most recently — bought positions.

Here are five key lessons that can help you improve your returns, along with stock examples for each.

1. Hold Centered Positions

This is not for everyone. A lot of investing is about managing risk, and large positions increase your risk significantly because if they go bad, you lose a lot of money. But over and over again, I’ve seen that investors who outperform often do so through sizable sizing. (Read this other column I wrote.) Talk to a financial advisor to see if it’s right for you. But Barron has no doubts when it comes to his funds. In a world where many managers limit their portfolio exposure to 2% to 3%, in Barron’s funds, more than 56% of the portfolio is in eight stocks. Each of them is a 4.5%-or-more position.

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The biggest focused position ever, is the Tesla TSLA,
+1.72%,
at 20.4%. Barron Funds famously took a large position at Tesla before going parabolic, and then stuck with it despite vitriolic skepticism toward Tesla CEO Elon Musk.

After the stock’s big move in 2020, the fund cut it a bit short, but Barron’s is maintaining a sizable position.

“We see a lot of potential, we don’t want to sell,” says Baron. “Of all the companies I cover and [those] Analysts come to me, the company I trust the most is Tesla.

Barron thinks the stock could still triple in less than a decade. What will you find there?

Tesla has built a strong brand with little to no marketing, and it has a 25% market share in electric cars, which are still in the early stages of adoption. Only 4% of vehicles are electric.

“People think we’re going into a recession, but the demand for their cars has never been better,” he says.

Tesla delivered one million cars last year. It will deliver two million next year, and it will reach 20 million per year by the end of the decade, Barron predicts. Tesla produces high gross margins in the upper 20% range because cars that sell for about $50,000 cost about $36,000 to make. Barron thinks that Tesla’s battery business could eventually be as big as the car business.

The next four large focused locations are privately held Space Exploration Technologies (operated by Musk), insurer Arc Capital Group (ACGL).
+3.18%,
Hyatt Hotel H,
+3.55%
and real estate market analytics company CoStar Group CSGP,
+3.17%,
at 5% to 6% each. (Holdings are valid through the end of June.)

2. Invest in Growth

Barron focuses on valuations, but the portfolio has a growth spurt.

This brings large exposure to the gaming and lodging sectors, which make up 20% of the portfolio. Barron, who was once a gaming analyst at Jefferies Group, expects solid growth as people seek to break free from the pandemic lockdown life.

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“People realized in the pandemic that life is short, and they want to get out and do things,” he says.

Baron flags his exposure to gaming and lodging companies that serve high-income consumers.

Barron thinks that even in a downturn, these companies should generate cash flow above 2019 levels. Wealthy customers will cut back on spending in any downturn. These companies have made their marketing more efficient by better targeting them and reducing certain customer perks. Here holdings include Hyatt, Red Rock Resorts RRR,
+2.21%,
MGM Resorts International MGM,
+2.13%
and Vail Resorts MTN,
+3.15%,

Barron also cited Krispy Kreme DNUT,
+2.53%
As a name with growth potential, as it continues to increase its presence in the market, Krispy Kreme calls “point of sale”. This includes things like flagship displays in convenience stores and supermarkets. Barron thinks Krispy Kreme could post 20% annual earnings growth, doubling in stock over the next three to four years.

3. Invest with Founders

Academic research confirms that founder-run companies tend to outperform. Think Amazon.com AMZN,
+3.15%
and Facebook parent meta platform meta,
+5.36%,
Which left the market far behind.

A lesser known name from Baron’s Holdings that fits the bill is Figs FIGS,
+3.63%,
The company sells scrubs, lab coats and related healthcare sector apparel designed for comfort, style and durability. Fig stock fell sharply from highs around $50 to under $10 shortly after its May 2021 initial public offering.

Baron compares Fig to Under Armor UAA,
+2.32%,
Popular sports apparel company. “People love their product,” he says.

He believes sales could double to $1 billion in three years. The company is run by co-founders Heather Hassan and Trina Spear. It’s a new position for the Barons in the second quarter.

Another founder-run company in Baron’s portfolio is CoStar, which provides research and insights on commercial real estate trends and pricing. The company has a competitive advantage as it has the largest research team in this field, and has been in business for more than 20 years. The company is expanding into residential real estate market analysis. Barron says this could help CoStar to quadruple revenue over the next five years or more. Founder Andrew Florence is the CEO.

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4. Look for Big Market Opportunities

Tesla is a good example, with a 25% share of the EV business that makes up only 4% of the overall vehicle market. So is another Musk company: Space Exploration Technologies.

SpaceX has two businesses, its Starlink Internet service backed by a group of satellites, and its rocket launch business. Starlink has huge potential as 3.5 billion people in the world do not have internet.

“It could be a trillion-dollar revenue business with a lot of margins,” Baron says.

Starlink recently signed Royal Caribbean RCL,
+3.56%
and T-Mobile US TMUS,
+2.14%
as customers. The rocket business has huge growth potential because SpaceX can launch at one-tenth the cost of NASA.

Barron thinks SpaceX could be a 10-bagger in the next seven to 10 years. The problem for regular investors, says Baron, is that SpaceX is still private, and it could take years to go public because it doesn’t need the cash. Unless you are an accredited investor, it is difficult to obtain privately listed shares. One way is to own Barron’s Fund, to invest in it.

5. Get Some Ballast

One risk with high-growth names is that their stocks could drop drastically if growth dips even slightly. Momentum is quick to sell investors in the name of development.

To offset the risk of high-growth companies like Tesla and SpaceX, Barron prefers to have potentially safe names like Arc Capital Group in insurance and reinsurance. Arc Capital’s share price is 1.5 times higher than its book value of $31.37. Insurance sector net premiums for the second quarter grew 27.5% year over year. Barron thinks the stock could double in four or five years.

Michael Brush is a columnist for MarketWatch. At the time of publication, they were owned by TSLA, DNUT, AMZN, META and RCL. Brush has suggested TSLA, RRR, MGM, DNUT, AMZN, META and RCL in their stock newsletter, brush up on stock, Follow him on Twitter @mbrushstocks.