Episode #417: Andrew Peck, Baron Capital – A Growth Manager’s Take on The Market
Guest: Andrew Peck is the co-CIO for Baron Capital, which is known for its long-term, fundamental, active approach to growth investing; it has over $50 billion in assets under management. Andrew serves as the Portfolio Manager for the Baron Asset Fund, Baron Mid Cap Growth Strategy and Baron All Cap Growth Strategy.
Date Recorded: 5/11/2022 | Run-Time: 52:02
Summary: In today’s episode, we’re talking to a growth manager to hear how he’s handling the volatility in 2022. Andrew shares his framework for looking at the markets, the importance for a growth manager to have the fortitude to let your winners run, and what leads him to sell a name from the portfolio.Then we get into what he sees in the market today and how he’s adjusting his portfolio. We touch on names like CoStar, Gartner, and even a private investment in a little company named SpaceX.
We talk a lot on this show about being willing to look different, stick with a strategy over the long-run, and remain disciplined during volatile times, and it was great to talk to a manager doing just that.
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Links from the Episode:
- 1:11 – Intro
- 2:01 – Welcome Andrew to the show; Baron Investment Conference
- 5:26 – Andrew’s early career
- 6:28 – Andrew’s investing framework
- 7:22 – Differences between Andrew and Ron Baron’s investment philosophies
- 9:40 – How Baron Capital differs from other growth managers
- 13:46 – How hard it is to filter out short term noise as long-term, discretionary active managers
- 17:54 – Portfolio construction
- 19:40 – What company has Baron Capital held the longest?
- 21:02 – A case study of names that reflects the Baron Capital philosophy
- 25:26 – Andrew’s sell discipline
- 33:32 – Investing in the private markets: SpaceX
- 36:50 – Why Andrew invested in StubHub
- 39:25 – Andrew’s thoughts on the market today after the recent selloff
- 41:35 – Deciding what to trim and add to during selloffs like 2022
- 46:04 – Andrew’s most memorable investment
- 48:58 – Learn more about Andrew Peck; baronfunds.com
Transcript of Episode 417:
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Meb: What’s up my friends? Awesome show today. Our guest is Andrew Peck, co-CIO for Baron Capital, which is known for its long-term fundamental active approach to growth investing. Today’s episode we’re talking to a growth fund manager to hear how he’s handling the volatility in 2022. Andrew shares his framework for looking at the markets. The importance for a growth manager have the fortitude to let your winners run, and also what leads him to sell a name from the portfolio. Then we get into what he sees in the market today, how he’s adjusting his portfolio. We touch on names like CoStar, Gardener, and even a little private company named SpaceX. We talked a lot on the show about being willing to look different sticking with the strategy over the long run and remaining disciplined during volatile times. It was great to talk to a manager doing just that. Please enjoy this episode with Baron Capital’s, Andrew Peck.
Meb: Andrew, welcome to show.
Andrew: Thanks very much. Glad to be on.
Meb: Let’s get the big question out of the way. When is the annual investing conference going to be back on?
Andrew: It’s definitely back on later this year. I believe it is November 4th. I’ll double-check that. But we are locked and loaded for 2022.
Meb: Is it public yet? Can you give us some insight as to the headliners?
Andrew: Unfortunately, we keep them under tight wraps. This year is no exception. But I can guarantee it’ll be a lot of fun and worth your time both for the investors, the investment advice and perspective you might get but certainly for the entertainment.
Meb: Well, watching this on YouTube, I’m looking in the background for like a Rolling Stones poster or something. For the listeners, explain what we’re talking about who might not be familiar.
Andrew: Sure. So, Baron Funds has become somewhat famous in the investment world for having an investment conference once a year, generally in the October-November timeframe. It started out 30 years ago across the street from us in a little private club in a room that held I think about 30 or 40 people. And as it’s grown over the years, it’s now in Lincoln Center, which for those of you who know New York is one of the premier performance spaces in the city and maybe in the country. We have it in the Metropolitan Opera House.
The idea behind the conference is twofold. Number one, to let our investors have a chance to kick the tires on us as their investment managers, which is the inverse of what we do on a regular basis by going out and kicking the tires of the companies we invest in. The way we try to do that is by having an all-day program that consists, first of generally four or five CEOs of companies that we and our shareholders have large investments in, come and explain in very direct and straightforward terms to our shareholders what the companies do, why they think they’re special, and our investors, in turn, have an opportunity after the CEO is done presenting to question those managers about anything on their mind.
And then as the day progresses, the investors have an opportunity to hear from all of the firm’s portfolio managers, myself and my colleagues, as well as our firm’s founder and chief executive, Ron Baron. After that is done, there is an opportunity to enjoy some great free entertainment. Over the years, we’ve had some pretty memorable entertainers. People like Paul McCartney, Billy Joel, Jerry Seinfeld, Stevie Wonder, Elton John, that list goes on and on. It’s always a great day and I think investors get a lot out of it.
Meb: How do you get entree? Are these tickets on like eBay, where Ticketmaster? Is this like a buffet thing? You got to own one share? What’s the deal?
Andrew: And I think it’s pretty straightforward. If you are an investor in Baron Funds and own a relatively modest investment, you are free to sign up online or through a variety of different channels that we have and show up in New York and attend the conference.
Meb: Cool. That’s what it looks like every year, the Red Rocks in Hollywood Bowl, summer schedule. I look at what you guys got and you get mixed in investments. So, I got to time at this year. I’d like to go… When was the last one, 2019?
Meb: Well, we’ll circle back as the year progresses. Fingers crossed, after a few years of pandemic, I’m ready for a nice quiet period. And here we are in 2022, we got a war going on in Europe. I’m like, let’s just get maybe two-quarters of just nothing happening. Wouldn’t that be nice? Just like pandemic recedes nothing on crazy in the world, but the arc of human history would argue that is unlikely. All right, let’s talk about what you guys been up to. Give me the timeline origin story for you. Were you Baron Funds right out of college? When did you join? What were you up to before that?
Andrew: I grew up here in New York City, where I’m speaking to you from that. I went to college at Yale. After that, spent a couple of years working on Wall Street at Salomon Brothers, and that firm’s equity capital markets group. After that, went back to graduate school, got a law and business degree out at Stanford, spent a summer while I was in that program as a summer analyst here at Baron Capital, and then came back full time afterwards. That was back in beginning of 1998. So I’m basically a lifer. Been here for 20 plus years,
Meb: That was an exciting time, and rarely do you find funds and asset management companies. So many go the way of the dodo bird or the graveyard through various cycles. And you guys have survived and done really well over the years. But that’s an interesting time to join. The late ’90s was really my favorite crazy time. I was in university and trading stocks from my engineering class, which probably why my GPA reflected that. So tell me a little bit about, for those who aren’t familiar, how does Baron funds think about the world? What’s the framework for investing for you guys?
Andrew: Baron Funds, in a nutshell, is a growth equity boutique that’s focused on applying a particular investment process, which we’ll talk about in just a moment to a variety of different market sectors. The firm’s heritage is in the investing in the small and mid-cap growth space. But over the last decade, plus, we’ve extended our capabilities to invest really, across the markets in small mid-large size stocks, as well as international stocks, emerging market stocks, and a variety of sector-specific approaches. The thing that we have in common across all of our strategies is that we’re very much long-term investors in highly defensible sexually growing growth businesses led by management teams that we think are best in class.
Meb: When we’re talking about framework and philosophy, they’re certainly Ron’s investing style. Are there major differences, minor differences between yours and the way Ron thinks about the world? And if so, what are they?
Andrew: Ron and I are really quite similar in that regard, which isn’t surprising, given that my whole investment career has been spent here working first, essentially, for Ron, and alongside Ron, and now on my own as a portfolio manager and firm’s co-Chief Investment Officer. But I certainly continue to spend significant amounts of time with Ron, as he does with all of the portfolio managers. His investment approach and process I think has done a very good job of being permeated throughout the organization as we’ve grown, both in terms of investment professionals and in terms of investment approaches and strategies.
Meb: Right on. Let’s get a little more concrete with the philosophy with the framework. Maybe tell me a little bit about what you’re up to now. So what sort of fund mandates do you guys have? Where are you managing? And then how are you thinking about putting these funds together, in 10 stocks, 1,000 stocks? Is it all in what? Let’s hear.
Andrew: As I mentioned, am the firm’s co-Chief Investment Officer, so I have some oversight responsibility across our firm’s 17 or so different investment strategies. But then I also manage our firm’s mid-cap growth strategy. The way that strategy operates, which is similar to the way all of our other strategies operate, is that we put together portfolios of businesses that meet a variety of criteria with the intention of owning those stocks for a significant period of time.
The average turnover in the portfolio’s I manage is in the neighborhood of 10 or 15% a year. I think the average turnover in growth-oriented funds tends to be in the 60% or 70% range, if not higher, and certainly, in many hedge funds, that number is north of 100%. The reason that is so significant in our view is that it’s indicative of the fact that we’re purchasing stocks and owning them on average for five years or longer, in many cases, 10 years, even 20 years, whereas many other active investors are owning stocks for quarters rather than years or multi-year periods, which is what we intend to do.
Our long holding period is really an outgrowth of our fundamental bottoms up research process. It’s also what we think has been the root of our investment edge over time.
Meb: Could we just dig in and unpack that a little more for listeners? Because I think that’s an underappreciated concept you just mentioned, which is if you were to chat with someone over coffee or beer and talk about growth managers, their assumption I think would be what you just mentioned, a hedge fund turnover, 100% hyperactive trading every day, but you guys don’t operate it that way. Can you tell us a little bit more about that? Why is that and what’s the underpinnings behind that? Because I think that that is great, obviously but it’s different. I wouldn’t expect that as a traditional preconceived notion.
Andrew: Given that the average investor is turning over his or her portfolio 60%, 70% a year, as I mentioned, what that implies is that the typical stock in that investor’s portfolio is probably in the portfolio for a couple of quarters. The thing that’s going to be most determinative of how that stock performs over a couple of quarters is almost inevitably whether or not that company meets, beats, or misses earnings expectations over a relatively narrow timeframe. In our mind, that is both the most efficient part of the market and that the most people focus their attention there both the buy-side and the sell-side. But it’s also the part of the market, which is perhaps hardest to gauge, meaning growth for any company rarely moves in a straight line up into the right, meaning businesses have all sorts of challenges, some of which are in their control, some of which are out of their control, which make it very difficult to report clean and consistent growth over the near term in the long-term.
What we try to focus on is the things that we think are most determinative in making certain companies exceptional over time. And those are businesses, which first are operating in a market in which there’s secular as distinct from cyclical growth. And really all I mean by that is businesses that are operating in markets in which the demand for that business’s product or service will, in our mind, inevitably grow considerably over time, somewhat irrespective of the amount of the underlying economic cycle or conditions over that period.
Secondly, we’re looking for businesses that have in our mind, compelling and sustainable competitive advantages. Because clearly, if you’re buying a business with intention of owning it for a significant period of time, it’s very important to have a high degree of conviction that whatever it is that makes the company special, in your view, today, is going to remain special and differentiated if not more so, two years, three years, five years, 10 years into the future. So we spend a lot of time talking with companies and thinking about what differentiates them and whether or not we think that differentiation can persist.
And then lastly, we invest in people as much as we invest in businesses, meaning before we invest in any business, we spend significant time with the management team of that business, questioning them across a wide range of topics and issues, trying to understand what drives those managers, both as individuals, and what talents and vision they bring to the companies they’re leading.
So we’re really the opposite of top-down investors who are using either quantitative screens to identify particular investments that might be interesting at a particular moment in time.
And then similarly, everything we do is micro rather than macro focused. What I mean by that is, I don’t believe that I have any more insight into whether the economy is moving in a particular direction tomorrow or next month. And anyone else I hear talking about that on “CNBC” or in the “Wall Street Journal” each day, and frankly, I’m skeptical that there’s anyone who’s been able to demonstrate an ability to predict those sort of macroeconomic events accurately and consistently over a long period of time. So what we try to do is focus on areas where we think we really can add value and can differentiate ourselves. And that’s by understanding businesses and their drivers and management teams and their motivations better than any other investor. And that’s where we spend all of our time.
Meb: Yeah, we like to call it what you just referenced on the macro side. We’d like to call the macro bullshitters. And like I say that humorously because I sometimes fall into that camp, but I own the domain. So, listeners, if you want macrobullshitters.com, I bought it for a friend to give as a gift at one point, but I’ve held on to it, I’ve forgotten.
Anyway, what you say I feel like is the constant pole and seduction of markets. I feel like particularly professional investors, they always say they have a long-term horizon. And then you look at what they do, and they often operate on a short-term horizon. Morgan Housel had a great chat the other day on Twitter. He says, “A book called “Shut Up and Wait,” each page is just the chart of the long-term stock market.” And so, while we’re talking about buy and hold and stocks, in general, here, I think the same applies to thinking in terms of the difference between a business or a company and its stock short-term. I’m trying to think a year 3, 5, 10 on out for a company versus the short-term noise. How hard is it to do that?
You guys are a discretionary active manager. For me, I can just blame it on the computer, say, I don’t know the computer just decided to do that. Do you guys have any, like, guardrails committee? Is it you just have a process on the cell discipline and things? How does that play out in practice, as opposed to just say, “Yeah, we got a long term perspective?” It’s easy to say.
Andrew: To start with, I and the investment team that works alongside me… And as an aside, we’re a group of about 43 people in our research department, a dozen or so senior portfolio managers, 20 plus analysts organized by industry specialization. So we have people here who spent much of their careers focused on the healthcare sector or the information technology sector, etc. So, the portfolio managers, many of whom are generalists, like myself, have the luxury of working alongside long-tenured analysts who really become industry specialists in various domains.
We all as an organization are looking for companies that share a common set of characteristics. As I mentioned, businesses that have, in our view, long-term secular growth opportunities, and meaningful competitive advantages led by management teams that we think are best in class. With that framework in mind, the way that works in practice, is the analysts along with me, as the portfolio manager, overseeing them meet extensively with large numbers of businesses, who have some characteristic that we think is potentially interesting that might lead to an investment.
We are not using quantitative screens to identify what types of businesses are worth our time. We’re really trying to spend a lot of time reading, thinking, understanding trends in the market, and then going out and identifying businesses that are worth sitting down and spending a couple of hours with, trying to understand how they line up on those criteria I mentioned a moment ago. When those businesses are trading at valuations that we think allow us to meet our targeted return, we will initiate positions, again, with the intention of owning those positions for an extended period of time.
So really, from a quantitative perspective, what we’re doing, which I think is different from many other investors is we’re trying to identify businesses that we think can double over a four or five-year time horizon, or set another way, we’re trying to identify businesses that we think can compound in the stock market at approximately 15% a year for an extended period of time, recognizing that very few businesses, very few stocks go up 15% each and every year. Sometimes they overshoot that, sometimes they undershoot that. Ultimately, for investments that we target and that are ultimately successful for us, they achieve that 100% growth over a five-year time period. As a result of that, what’s most important to us is not what we think companies are likely to earn next quarter or even next year, but really what companies are capable of earning four and five years into the future.
And essentially what we’re doing is modeling our company’s financial statements, earnings statements, looking at five years into the future, and trying to see whether or not we are comfortable that they can double in value, if we’re correct in our analysis. We’re buying stocks today simply at $10 that we think can be $20 In five years’ time, recognizing they could go to eight before they go to 20. We certainly hope they don’t. But we recognize in the short term, it’s very difficult for us to know what stocks are going to do. And we try not to lose the forest for the trees, so to speak.
Meb: Tell me a little bit about the general portfolio construction. I know the answer to what you’re talking about here. But in general, how do you put it together, as far as market cap size, how many names, 1,000 names conviction on the top holdings? How does it work?
Andrew: In the funds that I manage, which, again, are typical of many of my colleagues here, they’re reasonably concentrated, and they tend to be segmented by market size and market cap, meaning, I run a mid-cap growth strategy. I have colleagues who run small-cap growth strategies, large-cap growth strategies, etc. Within the mid-cap strategy. I’m trying to identify businesses that fall from a market cap perspective within the broad parameters of the Russell mid-cap growth index.
Meb: Which is what? What’s the ballpark on that?
Andrew: The ballpark at the moment is roughly $5 to $50 billion in market cap. And I’m trying to identify businesses within that broad framework that meet the criteria I mentioned earlier, with the hope of putting together a portfolio that tends to have between 50 and 60 investments at any given point in time. The top 10 positions represent generally 40% or so of the assets. The top 20 investments represent approximately 60% or 65% of the assets. So in that sense, it’s a reasonably concentrated high conviction portfolio.
Most investments start out toward the bottom of the portfolio from a weighting perspective, and grow and appreciate over time to become larger investments in the portfolio. So of the top 10 investments in the portfolio, all of them have been owned for five years or longer. In some cases, they’ve been known for 10 years or longer.
Those are really businesses that we’ve known for a long time and that have appreciated considerably and become significant weightings in the portfolio as a result.
Meb: What are some of the names? Who’s on the Hall of Fame of longest-held stocks? Who’s got the crown? Are there a couple that come to mind?
Andrew: Probably the one with the crown is Charles Schwab, the brokerage firm. We have been investing in that business since 1992. I think our cost basis is in the 60 or 70 cents a share range, and the stock is $70 or so down from $90 not that long ago. It’s been 100 bagger and clearly a great investment for us.
Meb: I’m waiting for one of these big brokerages to snap up Robin Hood as it continues declining one of these old school guys with a giant market capitalization. It’ll be curious to see how this plays out in the coming years and months. Who else is in the Mount Rushmore of old-time names, Schwab? What else we got?
Andrew: We’ve owned Vail Resorts, the company that operates the ski mountain as well as a variety of other ski mountains. We’ve owned that since 1997. That’s also been a great investment for us.
Meb: Do they throw in a free…? What is it the epic pass for Vail I think?
Andrew: Unfortunately, it’s not free. But definitely a whole bunch of us here are skiers and active users of that pass each year.
Meb: Tell them they should sponsor the podcast. We’ve got a mountain collective and icon as sponsors because they know our demo. We talk a lot about skiing on here. And I got in very few days this year. Fingers crossed, I’ve always wanted to ski in South America during the summertime. So, TBD. We’ll see. If you’re listening Vail, hit us up.
Well, that’s good. It’s fun to kind of read y’all’s reports, quarterly letters because you talk about what you’re buying, you talk about companies, but they’re all to, you talk to which ones are helping performance, which ones are hurting performance. A lot of people only like to talk about the winners, which is easy and fun to do. But the painful scars, I think are useful in many ways too.
So, why don’t maybe almost is like a case study, talk about a name or two, couple names that you guys like or that you’ve added that gives a good painting of how you think about this Baron Fund and this name that’s included a company that has the characteristics that we’ve talked about thus far, management team advantage, and business model, and all that good stuff.
Andrew: Sure. So, the largest investment in my portfolio, and one of the largest investments across our firm is a company called Gartner. It’s a name you may have heard of. It’s often in the press. It’s the largest research firm focused on the information technology sector. We’ve owned Gartner for 10 years plus, at this point. Our cost basis is in the teens. The stock is North of $250 at the moment. So it’s clearly been a great investment for us, and it’s one we think will continue to compound very nicely for us from here.
The reason we were interested in Gartner initially, is that Gartner is in many respects a great way to play the increasing prevalence and complexity of technology in all of our lives, to the extent, you believe businesses across the world, large, medium, and small, are going to be spending more on technology go forward are going to be investing more of their management time trying to understand how to use technology as a competitive differentiator for whatever it is they do. The more one has to believe that Gartner is an attractive way to play off that trend because the way Gartner operates is basically by selling to businesses, again, large and small across all geographies, various types of subscriptions that help the decision-makers at those companies do two things. Number one, decide what type of technology is best for their particular needs. And then secondly, once they’ve made that decision to help them figure out which vendor of that particular technology is best suited for their needs.
Essentially, a Gartner subscription allows a CIO or another relevant decision-maker at a company to consult with a third party that’s effectively like a Switzerland within the technology market, who has an in-depth understanding of various markets and sub-markets within technology, whether it be cloud computing, artificial intelligence, email security, etc., helps those decision makers decide how to structure those firms solutions to take advantage of that technology and then figure out who they should be buying that technology from. The way Gartner operates is by selling generally annual subscriptions to decision makers that allow them to tap into Gartner’s 1,000 plus analysts who are covering a wide variety of technology and markets to get the sort of information they need to make those decisions.
The reason it’s such a compelling investment, in our view, is that it’s hard not to imagine that information technology spending will be in secular growth mode for as long as I’m in this business. As it is, Gartner has a very scalable solution, in that, it is essentially producing intellectual property. That intellectual property can be produced once and then sold again and again, at very high incremental margins, and it is applicable to purchasers all over the world.
Gartner orders a magnitude larger than any other research firm in its business, and it has a very attractive financial model, whereby If it’s selling largely subscription-based products, it’s recognizing the income for those products upfront. As a result of that, it generates a significant free cash flow significantly higher than its reported earnings stream. And it has demonstrated an ability to use that free cash flow in ways that are very value creative for shareholders, both in terms of doing small and highly accretive acquisitions, and also buying back its own stock.
Meb: For the people listening to this, I think one of the bigger challenges for investors often is to hold on to the big winners. If you read a lot of the academic literature and practitioner too, it’s so much of the returns of not just indices, but funds can be determined by these 10 baggers, these 100 baggers that take time to compound.
Hey, man, if you get a 15% to 20%, or for 5,10, 15, 20 years, my God, that’s an amazing horse to ride. The challenge for many is the path. There are plenty of jiggles along the way. Tell us a little bit about, and this could be specific to Gartner or not. But how do you think about the sale discipline? You’ve had a stock, you’re attached to it, it’s like a family member at this point. It’s done well, you made a lot of money. But how do you let it go? Is it a pure price-based discipline? Does it have to be something changed in the business? Is it sort of a multifactor, conceptual latticework that comes to play? How do you guys do it? How do you kick it out?
Andrew: What I’d say is we invest in businesses that we think can double over five years in time. And as we all know, as businesses, we continue to roll forward our valuation models and metrics to see whether or not as the stock price moves up or down, we continue to have conviction that that same return opportunity is present. In the case of a company like Gartner, which we’ve owned for a decade plus, we have continually rolled forward our valuation framework to see whether or not we feel comfortable, continuing being able to meet our return hurdle.
With that being said, deciding whether to sell a company always has an art part as much as a science part, meaning, we own companies because we think they have both secular growth and meaningful competitive advantage.
If one of those two things changes, in a way that’s structural, not short-term in nature, that’s certainly a reason to sell but that is a challenging thing to know with certainty. And that’s why we spend most of our time researching stocks that are in our portfolio that we’ve owned for significant periods of time to continually monitor whether or not the competitive framework has changed in a way that we think is long-lasting whether than short-term in nature and then similarly, whether or not something has changed about the ultimate market in which the business is operating, that would lead us to perhaps think that the secular growth opportunity that we had identified at the onset remains compelling several years in.
I certainly agree with you that the way we’ve made significant returns over time, has been disproportionate as a result of owning a relatively small number of stocks that have performed remarkably well over time. And I think that the mistake perhaps many others make is they see a stock that’s gone up 100%, 200%, 300%, whatever it is, and they just can’t possibly imagine that a stock that’s gone up that much is going to continue to go up. But the best businesses do just that, particularly within the mid-cap marketplace, which is where I make my investments. The ability for a business to scale from 5 billion to 10 billion to 20 billion to 30 billion is certainly not easy, and very few achieve that. But with the benefit of hindsight, virtually every mid-cap company that’s 30 or $40 billion in market cap was $1, $2, or $3 billion in market cap that prove themselves. So they’re certainly a great track record of companies doing that. It’s just a question of identifying the right ones.
Meb: Yeah, there’s a quote… I mean, this is from a trend follower, but my buddy Jerry Parker says people are essentially fearful with gains and hopeful with losses, where they often hold stocks going down. But if something does well or doubles, like, oh my God, you know, it’s a good feeling to book that game. This stock doubled. We’re going on vacation. We’re moving to the Bahamas. That challenge I think is very human in real, but many times the portfolio the big returns are generated by those multi-year compounders. Like, the 50% drawdowns for many of these stocks. I mean, Amazon was famously 95 percenter back in the .com period on its way to I don’t what $2 trillion market cap can be painful, but I think it’s more of a feature than a bug to shake out all the not the diamond hands. I know what’s the opposite the weekends for the crypto crowd? I can’t remember the name.
Andrew: Yeah, I agree with you. And that was sort of the point I was trying to make earlier with few exceptions and frankly, I’m not aware of any of those exceptions, the greatest companies in the world, Amazon, Apple, etc., have all had meaningful drawdowns over time. I think what makes a great investor, in my view, is the ability to have sufficient conviction in one’s ideas to not get shaken out during times when, frankly, from a psychological standpoint, as well, as a market standpoint, it’s difficult to hold on. And we’re certainly going through an environment like that, broadly speaking in the growth space.
Meb: What’s nice about your fund and strategy, and I give this same consideration to a lot of managers, when you’re picking an active manager, in my opinion, you want someone to look different. And if they’re just going to buy the S&P closet index, where you’re kind of like, “What’s the point?” Because presumably, we’re all going to charge more than three basis points when you could just hang out the S&P. So I like looking at top 10 lists where a lot of the names or names I’ve never heard of. I’d heard of Gartner, obviously, FactSet that’s my world, but some of these others Vail, of course, skier, but a lot of these others are new to me.
Talk to me about instead of Gartner let’s flip to something more recently, what’s interesting to you guys that you guys have been picking up, purchasing over the last year or two that you think is a good case study on how you guys think about the world and the opportunities out there?
Andrew: As far as businesses we’ve been buying recently, one of the larger recent additions to the fund has been an increase in my stake in a company called CoStar Group. CoStar is the leading provider of information and marketing services to the commercial real estate industry, as well as to the residential apartments industry. CoStar is a fabulous company, in our view, that is a data and analytics company, which is one of the types of companies that is most compelling to us, in that, CoStar has over a long period of time compiled very valuable databases with information about various real estate end markets that, at this point, would be virtually impossible, in our view, for potential competitors to recreate. That data has become weaved into its customers’ workflow and work processes, such that it would be extremely difficult for its customers to operate effectively in competitive markets without access to CoStar’s data.
As a result, it’s built a very compelling business with a very attractive financial model. One of the things that has made CoStar compelling as a stock recently, in our view, is that CoStar announced recently that it was making a large new investment into an additional vertical for it, that being the residential housing vertical, it is a very large market, one where having differentiated data can be extremely valuable to customers, and one where we think CoStar’s existing expertise will be very leverageable. With that being said, the stock fell rather precipitously, it’s down roughly 50% from its high of six or so months ago, largely on investors’ concerns that it is investing significantly into this new vertical, given the tremendous track record of the company and its management team, given that it has successfully invested in highly accretive manner into other verticals in the past, we very much believe that its investment in the residential marketplace will be successful over time will create significant shareholder value. And as a result, the stock feels awfully compelling to us here down 50% from its high six months ago.
Meb: Well, that’s Mr. Market showing up on a given day with opportunity and crazy pricing. That’s the beauty of the markets to kind of wait and see what’s happening. How much informing of the private markets do you guys watch? Is that something that plays a role in your strategy or what’s going on? And how has that changed over the past decade or so?
Andrew: We as a firm invest very selectively in private opportunities. We feel like our expertise is best applied in the public markets. But with that being said, there are occasionally compelling opportunities that come to us from private companies that we think are worth investing in, particularly given our long-term time horizon. I have in the funds I manage a small investment in SpaceX, which is certainly a well-known company that is an opportunity that came to us largely because we have a long-term successful relationship with Elon Musk and Tesla. SpaceX in our mind is sufficiently compelling and differentiated as a business that it made sense for us to invest in it in the private market with an eye toward it becoming a public security at some point in the future.
Meb: I tell you, man, SpaceX, I’ve invested in over like 300 private companies, at this point. And I saw them come across my desk. And this has been an evolution for me where I look at something and there’s two areas that I used to may say or would be eliminating criteria. And it used to be… I was like man, “That’s just way too ambitious” was one for me, and I miss a handful of really wonderful opportunities including SpaceX for that reason. I was like, “This guy’s got a lot on his plate. This seems really ambitious. No one’s done this before,” all the idiotic reasons, but I love the phrasing which goes through my head now, which is, of course, what if it does work? And then what’s the TAM? You have the U.S. TAM. And then now we have the entire solar system. So that’s a big addressable market.
And the other is the scale of potential returns if something’s already at a $10 billion valuation, but, you know, hell, if these companies can still scale… So I’m sad to miss that one. I was the aerospace, come from aerospace family. And so, we talked a lot of on this show of startup investing in the space economy, which seems like an oxymoron. But that’s a big miss for me. So I’m glad that you guys were able to take a look there, because it’s going to be fun to watch that starship take flight here, eventually.
The private markets, I mean, it’s interesting, because the lines are becoming increasingly blurry with late-stage private-public, how the funding rounds have gone the last 10 years of companies perhaps going public longer in size. It’ll be interesting to see how this space evolve, as liquidity continually moves into the private markets, it’ll be fun to watch. So these are included in the y’all’s funds, the current funds that you manage, or how’s it work?
Andrew: Yes, in some of our mutual funds, we have small allocations to private companies, SpaceX being the largest. And in our view, when in our role as public market investors, particularly compelling private opportunities come our way, SpaceX being a great example, we will make investments into those funds. But from a risk management perspective, it’s very important to us, and I think, to our investors to keep those as small positions within the portfolio, given that they don’t have obvious liquidity in most cases.
Meb: I was trying to lead you into talking about StubHub. I used it recently because I just went to my first Pearl Jam show. I was in LA. I went by myself because I couldn’t drag any my friends going, which, by the way, is like an incredibly enjoyable experience. You don’t have to deal with anybody else and they want to go get a hot dog or whatever. Anyway, so tell me what’s the thesis there?
Andrew: StubHub is, in our view, a highly compelling platform business, meaning, in theory, there should be, one, maybe two places where everyone around the world goes on the internet to buy tickets to any and all events at the most compelling price available in the secondary market. It’s a market in which liquidity breeds liquidity, meaning, more users or purchases of tickets, more people listing tickets for sale and vice versa. StubHub is a company that had been owned by eBay for a decade-plus. It was not, in our view, terribly well managed when it was under eBay’s ownership. And last year, a company called Viagogo, a European-based company founded by one of the original co-founders of StubHub named Eric Baker.
Viagogo went and purchased StubHub from eBay. The resulting company renamed itself StubHub from Viagogo, so it’s a little bit confusing. But basically, StubHub is now a truly global operation that is endeavoring to become the single place as mentioned around the world where fans go to purchase tickets for all types of live events, be it sports, entertainment, etc.
Meb: So, I’ve always had a business idea, you can pass as long as StubHub CEO, I said, “Why isn’t there an exchange for people who say, ‘You know what, I have this huge ticket inventory. It’s a pain in my ass. I can’t sell it because this isn’t worth anything. It’s rafter seat for this terrible game.'” I was calling it miracle tickets, homage not to the grateful dead people who just go the show holding up a one, trying to get a free ticket. People still do that to other shows. But saying, basically, “Look, there’s this inventory that people are not going to sell. It’s not worth the fee at the time but you could essentially trade it in for credits, at which point almost like a frequent flyer miles. StubHub could probably spin it up as their own internal crypto. So, there you go. There’s a market for giant inventory of people who just, like, don’t even want to deal with it. Like, here, just take this ticket. Give me 15 credits for this, and I’ll use it for something later. Anyway, pass along my idea.
Andrew: All right. Interesting idea. I promise I’ll pass it along.
Meb: There’s the five-year, the growth rate has doubled right there. They’re going to be the good karma winner out of this. Let’s chat about one more idea. As we’re here in 2022, parts of the market have been selling off. Is this creating opportunity? Are you seeing names come across your desk that you are, okay, this is something I’ve always wanted to buy? We haven’t had a chance or do you think it’s not a time of opportunity? What’s the opportunity…? What does that look like for you here in Q2 2022?
Andrew: We certainly think this is a time in which there’s lots of opportunity for long-term investors like ourselves to make investments that will ultimately achieve our desired returns over time with the caveat being I can’t tell you whether those investments are going to go up or down tomorrow because we are clearly living through a time in which there’s a lot to volatility, a lot of uncertainty. So I think it’s as good a time as any to be really focused on managers who are making investments entirely based on company’s underlying fundamentals. What those fundamentals will be valued for in the near term, is hard to know. But having been doing this for close to 25 years, I do know that ultimately, at some point in time, company’s value is recognized appropriately in the marketplace.
As a result of all of that, there are tremendous opportunities, I think, among stocks that have been in my portfolio for long periods of time, that in many cases are down significantly from where they were at the beginning of the year, for reasons that are almost entirely macroeconomic in nature. We’re living through a period in which companies that report good earnings go down, companies report bad earnings go down. There really doesn’t seem to be a lot of discrimination in the marketplace as to what is driving stocks in the near term.
So, identifying businesses that have compelling competitive advantages, compelling and growth opportunities, looking out over five and 10-year periods, I think, offer really compelling buys in the market like this. There’s a lot in my existing portfolio that I’m doubling down on. And there are certainly increasingly opportunities, particularly in the growth arena for stocks that had been market darlings until recently that are now trading at prices and valuations that we’ve never seen before. It’s certainly very easy to find stocks to buy in a market like this, when one has a multi-year time horizon in mind.
Meb: What is the challenge? Because I feel like from a discretionary standpoint, this would be hard for me of looking at the names your portfolio like, man, I love X, Y, Z stock, it’s down, we should be buying more of this. But look at this other stock. This also looks awesome. Maybe we should be buying this and, you know, having more diversification. So, this constant tug pull of the stocks that you own and know versus ones that you want, how do you balance that? Is it a simple equation of, hey, this one looks like it can do five years out a better modeling and we think this is an opportunity? How’s it actually play out? I know there’s theory versus practice.
Andrew: Your right to call it a push and pull or tug because it is frankly difficult in an environment like this in which everything’s on sale to figure out what’s most on sale and what’s most compelling. What I’d say is, in practice, stocks that have been in my portfolio for a long period of time are stocks and businesses where by definition, I and the research team, understand the business, understand that competitors have relationship with management teams that go back many years, if not decades. In turbulent times like this, there is a bias, on the one hand, to buy more of what you know and know well, given that there is so much skittishness and uncertainty in the market. But then on the other hand, as you mentioned, lots of stuff that was too expensive, in my view, has now become a hell of a lot less expensive.
I and the team are really sharpening our pencils and spending lots of time with new companies, new potential investments that frankly, weren’t really high on our radar screen until recently, because they were too expensive.
One of the nice things if there is anything nice about living through a difficult time in the market like this is management teams of businesses are in many cases more receptive than they’ve ever been to sit down with firms like ours, which they know are long-only, long-term investors in their businesses, potentially, to give us the time to really understand what it is they do, what makes them special with the hope that we become investors for the long term in difficult markets like this. So we are certainly taking advantage of that.
Meb: I think that’s a thoughtful response. It’s always a challenge with Mr. Market. My assumption would be that as a growth style box type of investor, that a lot of the broad designation would be sector over weights to tech, of course, and maybe healthcare. Are those the broad sector exposures or are there other areas where you say, “Actually, Meb, we’re finding a ton of growth and utilities or something?” What’s the actual portfolio look like with themes of sector and industries?
Andrew: From a growth perspective, we are rather agnostic among industries, meaning, I’m not putting together a portfolio based on the idea that I want to be a little bit overweight or a little bit underweight technology or any other sector. The reality though is much of the growth in the economy, in our view, looking out over a multi-year timeframe will be in areas like technology and healthcare. Those two sectors represent roughly half of our portfolio. But then the other half is well diversified across areas like financial services, consumer services, consumer discretionary businesses, and others.
Conversely, as growth investors, it’s generally challenging for us to find compelling multi-year opportunities in areas like utilities, like materials, like consumer staples, and like energy, frankly, Energy is certainly having its day in the sun in an environment like this, but it’s inherently the sort of business or sort of industry in which macroeconomic factors like commodity prices are going to be most determinative of whether stocks perform well or poorly over any given period of time. Those tend to be areas we gravitate away from, and instead, really focus on the areas I mentioned, where doing fundamental bottoms-up analysis can identify real special companies over time.
Meb: It’s going to be fun to watch. The thing about growth to me, one of the benefits and beauties of it versus looking at the broad market and particularly macro… And I put this in the same category as startup angel investing is it’s so optimistic because you’re looking specifically for a brighter future of growth of optimism of what companies are doing versus a lot of the day to day noise of the Fed and yada, yada. It can be very depressing for general market noise news, but optimistically looking at companies growing makes a lot more fun. Looking back on your career, man, all right, 20 years plus, you’ve been at this for a while, you’ve probably made hundreds, if not thousands of investments, most memorable, any come to mind, good, bad, in between.?
Andrew: One of the most memorable and special investments for me over time has been in a company called IDEXX Laboratories. IDEXX is the leading manufacturer of diagnostic equipment and diagnostic tests for the pet community, household dogs and cats. I’m a very happy and proud dog owner, as are many in my family care a lot about pets.
Meb: What’s you got? What’s the breed?
Andrew: I’ve got an eight-year-old cockapoo named Gus, who’s just a darling. Having been involved in IDEXX for 15 years at this point, have been involved in watching them basically develop a whole set of diagnostic tools and approaches that have been remarkably impactful in improving the lifespan and health condition of pets all over the world. So that’s really been a neat thing to have participated in.
Meb: What is the…? As we look at the growth, obviously, people pay whatever for their animals, is there any particular growth area or specifics for that?
Andrew: The reason IDEXX is grown remarkably over time, and I think will continue to grow remarkably go forward, is that first, the pet population continues to grow at a very attractive rate. It was goosed a bit by what went on for many of us during the pandemic. But even separate from that, it’s been the inclination of consumers around the world as they become wealthier, both in established markets and in emerging markets to become pet owners over time. You have more pets in the world, and you have more and more ability to spend money on those pets to improve their health profile and improve their lifespan as a result.
IDEXX is the leader in that space and is able to commercialize a number of technologies that have first been developed in the world of human healthcare for things like cancer and heart treatments and to apply those same types of treatments in the animal kingdom. As a result of that, you have very attractive secular top-line growth drivers, in my view. And because IDEXX is so dominant in the veterinary spaces, in which it operates, it has been able to raise its prices at reasonable rates over time, such that its operating margin has expanded very nicely as well current with its increase in its revenue growth rate over time. It has really become a compelling financial model over time.
Meb: My brother works as a psychologist and therapist, and he said during the pandemic, he was going to write a book about how to help your pets cope with the trauma of when the pandemic ends, everyone going back to work and not being home for 20 hours a day, the pets would be like, “What happened? I’m so lonely, all of a sudden. My friends are all gone.”
All right, my man, it’s been a lot of fun. Where do people go if they want to read your quarterly reports, they want to get a ticket to see MC Hammer and the Dixie Chicks and anyone else this fall, what’s the best place to go? Where do they find out more?
Andrew: Any and all information is available at baronfunds.com. We have tons of information there about strategies I manage, the strategies my colleagues manage, words from Ron Baron, our founder, information about the investment conference, and also some other neat stuff. So, please seek us out there.
Meb: Awesome. Andrew, thanks so much for joining us today.
Andrew: Thank you.
Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at firstname.lastname@example.org. We love to read the reviews. Please review us on iTunes and subscribe to the show, anywhere good podcasts are found. Thanks for listening, friends, and good investing.