Ron Baron Comments on Stocks: Millipore, Air Products, Hyatt Hotels, DeVry, Strayer Education, Arch Capital, Vail Resorts, FactSet, MSCI and Concho Petroleum

Amid concerns regarding our economic recovery, unemployment levels and government budget deficits, U.S. stock prices remain far below levels they achieved two years ago. This offers significant investment opportunity, in our opinion. We think this opportunity may last for an extended period. This is because strong demand for stock investments from individuals and institutions may take awhile to recover since the fears engendered and the losses produced by The Great Recession over the last year have been so great.

“U.S. economic history shows the five years after deficit peaks invariably have torrid economic growth. President Clinton left office in the late 1990s with budget surpluses and low unemployment, yet the succeeding decade was nothing to write home about in terms of growth or stock market performance,” according to strategist James Paulson in a recent Barron’s article. Paulson suggested the next ten years will be much better than the last ten.

From 1970 until June 1982 Ron was employed by several brokerage firms as an institutional securities analyst. Ron has managed investment portfolios for others since 1975. Ron founded Baron Capital Management, a registered investment advisor, in 1982 to provide investment management services to institutions and individuals. Ron was the founding Portfolio Manager for Baron Asset Fund, Baron Growth Fund, Baron Partners Fund and Baron Retirement Income Fund. Today, he is Portfolio Manager of the Baron Growth Fund, Baron Partners Fund and Baron Retirement Income Fund.

During the first quarter, 13 of the Fund’s portfolio investments representing 47.55% of the Fund’s assets under management achieved share price appreciation greater than double digits. The three top gains were Millipore’s 45.09%; Airgas’ 37.23%; and Hyatt’s 30.69%.


Millipore was acquired during the period for $107 per share by the German drug pharma business Merck KGaA. We had invested in Millipore at $57 per share in January 2009. We made that investment because we believed that innovative, large molecule biologics will provide important therapeutic care for our citizens. We preferred to invest in Millipore, which is the leading provider of equipment and materials to the manufacturers of such drugs, rather than try to choose which biotech drug manufacturer would develop a successful drug.


Baron Partners Fund’s performance was also helped during this period by the proposed acquisition of Airgas by Air Products. The Fund invested in Airgas in February 2009 when its price was about $37 per share. We did so believing that this unique distribution business of packaged air to industrial businesses could earn $6 per share in four years, and its share price could then reach $90. Air Products apparently agreed with our assessment and offered to purchase Airgas for more than $60 per share this year.


Hyatt Hotels’ earnings from its owned hotels have fallen about 50% from their peak levels more than two years ago. Baron Partners Fund invested in Hyatt Hotels during the past several months for about half of what it would cost to replace the company’s owned properties. This is though we believed its earnings could rebound sharply in an economic recovery, and the company had substantial physical expansion opportunities both in the United States and Asia. Unusual for a real estate oriented investment, Hyatt had no net debt and was valued at a multiple of currently depressed earnings that was less than the multiple accorded to many hotel businesses when they achieved peak earnings. Hyatt’s shares gained 30.69% in the quarter. Solid stock performances of our long-term investments in education businesses


DeVry and Strayer Education also boosted Baron Partners Fund’s results during the period. Strayer’s shares gained 14.98% during the period; DeVry’s gained 14.93%. Both companies’ stocks had underperformed stock markets last year, while their businesses continued to grow strongly. This anomaly was recognized by their managements who, enabled by their businesses’ well capitalized balance sheets and strong cash flows, continued their significant stock repurchase programs.


Management of Arch Capital, also believing their stock was significantly undervalued, backed up their belief with a significant stock repurchase program enabled by that company’s robust balance sheet and cash flow. Vail Resorts also has a continuing share repurchase program. Arch shares gained 6.57% in the quarter; Vail Resorts shares increased 6.06%. We think all of the above investments offer continued strong long-term appreciation opportunities.


Taking advantage of low cost money and attractive asset acquisition/disposition opportunities were FactSet, MSCI and Concho Petroleum. All these businesses also achieved strong gains in the period.


We think the appropriately capitalizedbusinesses in which the Fund has invested will continue to avail hemselves of such opportunities.