(Forbes) - Despite a brutal year for the U.S. stock market so far, billionaire money manager Ron Baron and his many retiree investors were undeterred as they gathered for the Baron Investment Conference last Friday. With nearly 5,000 investors and members of the media crowding into the Metropolitan Opera House in New York City, it was the first time since 2019 that the firm was able to host its annual gathering.
The mood was far from gloomy. The extravaganza featured presentations from a handful of company CEOs and Baron Funds portfolio managers as well as a headline musical performance from Bruno Mars. Whats more, guests were treated to a surprise appearance from Tesla, SpaceX and TwitterTWTR +0.7% CEO Elon Musk, who was interviewed by Baron onstage.
Even though Tesla shares have fallen 50% since the start of the year amid the wider market selloff, Baron has a stunning 45% of one of his largest funds invested in the carmaker’s stock, up from 41% in early 2021.
Altogether, Baron’s firm has 19 funds that oversee nearly $40 billion in assets; several of those have made big bets on Tesla—including the $6 billion (assets) Baron Partners Fund and the $700 million Baron Focused Growth Fund. The two funds are down 31% and 23% so far this year, respectively, but given the huge run-up in Tesla stock in 2020 and 2021, they boast solid longer-term gains. The Baron Partners Fund has returned an average net annualized return of more than 25% over the past five years.
“In ten years, Tesla will be the largest and most profitable company in the world,” Baron told Forbes in an interview before hosting his investment conference.
His firm is not only one of the top 20 largest shareholders in Tesla, according to filings, but Baron Funds also has a larger percentage of its overall portfolio allocated to the stock—11%—than many other large shareholders, who mostly top out at 5% or 6%.
A buy-and-hold investor, Baron is confident that his funds will rebound and continue to provide stellar returns in the future, chiefly because of his big bets on high-growth companies. He summed up the performance this year as not great, but “relative,” adding, “because of our low turnover and great long-term record, investors are willing to cut us some slack and be patient.”
Baron, who is 79 and founded his firm four decades ago, has lived through plenty of bear markets. He said he sees “big opportunities” today, following the roughly 21% drop in the S&P 500 index. “A year ago, nothing was cheap—now it’s the opposite,” Baron said. “Stocks are dirt cheap on an absolute basis.”
Many growth stocks have been hard-hit by higher interest rates. Baron admitted that sometimes it has been tough when “it’s all red on the screen” and markets fall, but that’s when his buy-and-hold philosophy becomes more important than ever. His funds, which typically have very low turnover, have continued to buy when opportune, only selling “when fundamentals change or if we need to rebalance the portfolio,” he explained. “Companies that we’re investing in should benefit and grow despite the chaos.”
What’s more, “at some point markets will stabilize,” Baron added, predicting a recovery by the end of 2024, with stocks likely to return to where they were in November 2021 and back to doubling every five to ten years.
A big reason for his rosy outlook is the firm’s big bet on Musk’s electric vehicle maker. The billionaire money manager first built his firm’s position in Tesla between 2014 and 2016, investing a total of $387 million, which has since generated billions of dollars in gains. Despite a 50% drop in Tesla shares in 2022, Baron remained convinced that his firm’s position will continue to pay off in the future: “If I could, I would buy more.”
The longtime Tesla bull emphasized the company’s high growth rate—both in terms of production and sales, while also expecting that the carmaker will further be able to improve its profit margins. Tesla has continued to increase its vehicle production and deliveries, last month reporting 343,000 deliveries in the quarter ending September 30, 2022—up from just over 250,000 a year ago. What’s more, quarterly revenue surpassed $21 billion, up over 50% from the same period last year.
He has also been actively investing in Musk’s privately owned rocket company, SpaceX, over the last several years. The firm invested nearly $500 million in previous funding rounds, including $100 million earlier this year, when SpaceX hit a valuation of more than $125 billion in May.
“Whenever SpaceX comes along, I buy more,” Baron said, adding that it has “unbelievable potential.” He predicts that in the next funding round, the company could likely surpass a $150 billion valuation.
“Everyone is going to know about SpaceX,” Baron told Forbes, adding that soon, through its Starlink satellite broadband service, “it will be providing internet for the planet.” He similarly remained bullish about the company’s Starship project focused on reusable rockets, which Musk has called “the holy grail of space travel” and crucial to expanding the boundaries of space exploration.
Baron also said he sees big opportunities with social media platform Twitter, acquired by Musk for $44 billion in a recently completed deal that included Twitter suing Musk to get him to complete the purchase–a suit that never went to court. As the new owner of Twitter, Musk announced sweeping layoffs last Friday, telling attendees at the Baron Investment Conference that the social media company “was having pretty serious revenue and cost challenges” before the acquisition. Still, the Tesla billionaire bragged that Twitter “ultimately could be one of the most valuable companies in the world.”
Baron isn’t worried about Musk taking on too much, contemporaneously serving as the CEO of three companies—including Twitter, which needs to make $1 billion in profits over the next twelve months to cover its debt payments.
Beyond his bets on Musk’s companies, the billionaire money manager has historically looked to invest in companies that are growing revenues over 15% annually, on average. He also looks for those that actively reinvest in their business, which he identifies as “a bullish sign” for future growth. With his optimism about an eventual market rebound and economic recovery, Baron particularly likes leisure stocks, which he thinks have large upside potential in the years ahead.
One of his most recent bets is medical apparel maker FIGS, which sells scrubs and other garb to healthcare professionals. Baron, who called the company the “Lululemon of healthcare” in an interview with CNBC earlier this year, likes its direct-to-consumer model and high margins. With a market capitalization of just over $1 billion, FIGS shares are down roughly 75% this year and now trade for less than $7. Baron said he thinks he can make up to ten times his original investment in the next decade if the company’s business model proves successful.
Baron’s funds have also been invested in Hyatt Hotels since the company went public in 2009. He remains optimistic about future upside, pointing out that room rates have risen significantly. The company operates more than 1,100 hotels and properties across 70 countries. Baron added that the business has been doing well thanks to solid margins and growing revenue, with Hyatt having consistently beaten quarterly earnings expectations so far this year. Shares are down just over 6% so far this year, much less than the broader market.
Another longtime favorite and one of Baron’s largest holdings is ski resort company Vail ResortsMTN -0.4%, shares of which he first bought in 2006. The stock is down 33% this year, after rising nearly 20% in both 2020 and 2021. Baron is a big fan of the company’s business model, especially with nearly two thirds of Vail’s ski passes (61%) getting sold in advance, meaning a big chunk of revenue gets locked in before the season starts. Thanks to that solid demand, the company is able to reinvest in the customer experience and new acquisitions. Vail has nearly 40 resorts in 15 states and several countries, with an acquisition in Switzerland earlier this year (the company’s first resort in Europe) and future plans to expand to Japan.
By Sergei Klebnikov
November 8, 2022
