In this article, we will take a look at Bares Capital’s top 12 stock picks. To see more such companies, go directly to Bares Capital’s Top 5 Stock Picks.
2023 was one of the best years for the equity markets, with solid gains across various sectors. Large-cap growth stocks fueled the rally depicted by the Nasdaq 100, which gained about 48%. But small-cap stocks underperformed last year. The small-cap Russell 2,000 only gained 11.9% in 2023.
The underperformance of small-cap value stocks was fueled mainly by concerns over the high-interest rate environment and deteriorating macroeconomics. The concerns made lots of sense, given that higher interest rates and softening demand owing to slowing economic activities tend to hit small-cap firms more than large companies.
The concerns are slowly easing amid growing expectations of the Fed cutting interest rates. Improving economic conditions characterized by higher spending power and a solid labor market is again making a case for small-cap companies. Interest in small-cap stocks started growing late last year as investors rushed to acquire stakes in highly battered stocks and take advantage of depressed valuations.
Bares Capital Management is one hedge fund well poised to take advantage of any outperformance of small-cap companies in 2024. Founded in 2000 by Brian Bares, the hedge fund strives to deliver category-leading returns while focusing on small-cap and micro-cap companies. Its portfolio comprises inefficiently priced stocks spread across various sectors, including technology.
The strategy allowed the fund to generate 53% in gross returns in 2010 at the height of the financial crisis. The hedge fund’s micro-cap equity portfolio was ranked as the 7th best performing in 2014 with a net of fees annual return of 14.07%. Even though small-cap companies underperformed for the better part of 2023, Bares Capital management was up by 19.84% in the fourth quarter, affirming solid stock-picking skills.
Source: unsplash
Bares Capital Management manages stakes worth $2.5 billion, with the most significant holdings in Workday, Block, and Etsy. Bares Capital Management’s top stock picks are spread across nine sectors, with tech accounting for the most significant share of the portfolio at about 30%.
Bares Capital Management also has significant holdings in the financial services and healthcare sector, offering exposure to some of the best small-cap companies. The hedge fund also focuses primarily on investments in the United States, accounting for more than 70% of the portfolio.
Mid-last year, Bares Capital Management reiterated its focus on small-cap companies by launching a unique Mutual fund. BCM Focus Small/Micro-Cap Fund (BCSMX) is the fund that makes it easier for individual investors to invest directly with an initial investment of $10,000 instead of gaining access through intermediaries like Schwab and Fidelity.
Our Methodology
Bares Capital Management boasts one of the most diversified investment portfolios for investors eyeing exposure beyond large-cap stocks. After exploring regulatory filings, we settled on Bares Capital’s top stock picks and ranked them based on the amount of equity stakes the value hedge fund holds. The hedge fund sentiment around each stock was calculated using the data of around 900 hedge funds tracked by Insider Monkey in the fourth quarter of 2023. Hedge funds’ top 10 consensus stock picks outperformed the S&P 500 Index by more than 140 percentage points over the last 10 years (see the details here).
Bares Capital’s Top Stock Picks
12. Twilio Inc. (NYSE:TWLO)
Number of Hedge Fund Holders: 47
Bares Capital Management’s Equity Stake: $32.52 Million
2023 share price performance: 50%
Twilio Inc. (NYSE:TWLO) is one of Bares Capital Management’s top stock picks in the communications service segment, offering customer engagement platform solutions. It provides application programming interfaces and software solutions for communication between customers and end users using voice, email, and marketing campaigns.
Twilio Inc. (NYSE:TWLO) was one of the best-performing stocks in the hedge fund’s portfolio, gaining 50% and outperforming the S&P 500, which was up by about 24%.
Management has reiterated optimism in achieving sustainable profitability in 2024 after shrugging off headwinds in 2023.
“We’ve structured the business with the aim of enabling Twilio to operate profitably in any financial climate and our first quarter non-GAAP income from operations is a strong signal of our ability to do so,” management said in a statement.
There were 47 hedge funds long Twilio Inc. (NYSE:TWLO) in the fourth quarter of last year. David Blood and Al Gore’s Generation Investment Management remains the most prominent holder, with stakes worth $645 million.
11. XPEL, Inc. (NASDAQ:XPEL)
Number of Hedge Fund Holders: 17
Bares Capital Management’s Equity Stake: $39.09 Million
2023 share price performance: -11%
XPEL, Inc. (NASDAQ:XPEL) is a consumer cyclical company and one of the most significant holdings in Bares Capital Management’s portfolio. The company sells, distributes, and installs protective films and coatings worldwide. It also offers automotive surface and paint protection film, headlight protection, and proprietary DAP software.
XPEL, Inc. (NASDAQ:XPEL) was under pressure in 2023 amid high inflation and significant interest rate hikes. Nevertheless, CEO Ryan Pape is confident about the company’s prospects for 2024.
“We are pleased with our full year 2023 performance and closed out the year with solid growth in the fourth quarter. We look forward to building on the momentum of last year across all of our initiatives, staying close to our customers and furthering the XPEL brand in 2024,” Pape said.
Likewise, it fell by 11%. XPEL, Inc. (NASDAQ:XPEL) was seen in the portfolios of 17 hedge funds in the fourth quarter, with Bares Capital Management the biggest holder with stakes worth $39 million.
Here is what Wasatch Core Growth Fund said about XPEL, Inc. (NASDAQ:XPEL) in its fourth quarter 2023 investor letter:
“XPEL, Inc. (NASDAQ:XPEL) was also a major detractor. The company develops and manufactures automotive products including window tints and cut-to-fit protective films for painted surfaces. The stock was down on news that Tesla, a prominent XPEL customer, started offering colo r and clear paint-protection film wraps in two California service centers without using XPEL’s products. This news caused investors to question how much business XPEL might lose if Tesla’s recent move is the start of a broader trend. Our initial reaction to the news isn’t overly pessimistic because Tesla vehicles account for only about 5% of XPEL’s revenues and because other automobile manufacturers have been increasing the use of XPEL’s products. Nevertheless, our senses are heightened as we continue to evaluate our position in the stock.”
10. Alarm.com Holdings, Inc. (NASDAQ:ALRM)
Number of Hedge Fund Holders: 29
Bares Capital Management’s Equity Stake: $42.98 Million
2023 share price performance: 30%
Alarm.com Holdings, Inc. (NASDAQ:ALRM) is one of Bares Capital Management’s top stock picks in the technology sector, focused on providing the Internet of Things and solutions for residential, multifamily, small business, and enterprise commercial markets. Alarm.com Holdings, Inc. (NASDAQ:ALRM) offers solutions to control and monitor security systems, including door locks, garage doors, and video cameras.
At the height of the tech boom in 2023, Alarm.com Holdings, Inc. (NASDAQ:ALRM) was up by 30% as the company delivered impressive financial results. At the end of the fourth quarter of 2023, 29 hedge funds in the Insider Monkey database held stakes in Alarm.com Holdings, Inc. (NASDAQ:ALRM), with Brian Bares’ Bares Capital Management being the biggest holder with stakes worth $42.98 million.
Here is what Diamond Hill Long-Short Fund said about Alarm.com Holdings, Inc. (NASDAQ:ALRM) in its Q3 2023 investor letter:
“We also initiated short positions in Mueller Industries, Bank of Hawaii, Alarm.com Holdings, Inc. (NASDAQ:ALRM) and Garmin in Q3. Alarm.com Holdings provides various security, monitoring and automation solutions for residential, multifamily, small business and enterprise commercial markets globally. We believe the current share price meaningfully overestimates the company’s future earnings power, while underestimating the magnitude of the challenges the company faces in growing its revenue base and expanding operating margins.”
9. Alteryx Inc (NYSE:AYX)
Number of Hedge Fund Holders: 48
Bares Capital Management’s Equity Stake: $117.16 Million
2023 share price performance: -6%
Alteryx Inc (NYSE:AYX) is another top technology holding in Bares Capital Management’s portfolio operating in the analytics automation business. Alteryx Inc (NYSE:AYX) offers a solution that helps automate worker tasks across the analytics value chain.
While Alteryx Inc (NYSE:AYX) was down by about 6% last year, it has broken out and shows signs of higher edging. The company has also emerged as an acquisition target amid reports Insight Partners and Clearlake Capital Group are in advanced talks to take it private.
8. Wayfair Inc (NYSE:W)
Number of Hedge Fund Holders: 50
Bares Capital Management’s Equity Stake: $137.28 Million
2023 share price performance: 80%
Boston, Massachusetts-based Wayfair Inc (NYSE:W) is an e-commerce company providing thirty million home product products. Its selection of products includes furniture, décor, housewares, and home improvement products.
Wayfair Inc (NYSE:W) remains one of Bares Capital Management’s top stock picks, going by the 80% gain in 2023.
7. Align Technology, Inc. (NASDAQ:ALGN)
Number of Hedge Fund Holders: 50
Bares Capital Management’s Equity Stake: $155.55 Million
2023 share price performance: 27%
Bares Capital Management maintains significant exposure in the healthcare sector through Align Technology, Inc. (NASDAQ:ALGN). The company designs, manufactures, and markets Invisalign clear aligners and iTero intraoral scanners used by orthodontists and dentists.
Align Technology, Inc. (NASDAQ:ALGN) was up by 27% in 2023, outperforming the overall market and affirming why it is one of Bare Capital Management’s top stock picks.
As of the end of the fourth quarter of 2023, 50 hedge funds out of the 933 funds tracked by Insider Monkey had stakes in Align Technology, Inc. (NASDAQ:ALGN). Israel Englander’s Millennium Management was the biggest holder, with stakes worth $212.10 million.
Polen Global Growth Strategy made the following comment regarding Align Technology, Inc. (NASDAQ:ALGN) in its fourth quarter 2023 investor letter:
“Align Technology, Inc. (NASDAQ:ALGN) was the largest relative detractor during the past quarter, primarily because of disappointing third-quarter earnings results where the company’s revenue growth fell short of expectations despite easy comparisons from a year ago. Ultimately, we decided to exit our position in Align during the quarter, as detailed in the Portfolio Activity section.
Align Technology represented another sale in the quarter. Align is the global leader in clear aligner teeth straighteners, having pioneered the category a couple of decades ago. Our decision to move on from the position is not a reflection of the quality of the business or the runway for growth ahead. Rather, given a still uncertain macro environment and the nature of their product as a big-ticket consumer discretionary purchase, we felt it more prudent to use the position as a source of funds to allocate to the aforementioned existing positions, which should prove more resilient with a narrower range of outcomes.”
6. CoStar Group, Inc. (NASDAQ:CSGP)
Number of Hedge Fund Holders: 36
Bares Capital Management’s Equity Stake: $172.61 Million
2023 share price performance: 10%
Bares Capital Management maintains significant exposure in the real estate sector through CoStar Group, Inc. (NASDAQ:CSGP). The company provides information, analytics, and online marketplace services to the commercial real estate, hospitality, residential, and related professionals industries.
Baron Focused Growth Fund made the following comment about CoStar Group, Inc. (NASDAQ:CSGP) in its Q4 2023 investor letter:
“Core Growth investments, steady growers that continually invest in their businesses for growth and return excess free-cash-flow to shareholders, represented 22.5% of net assets. An example would be CoStar Group, Inc. (NASDAQ:CSGP), a marketing and data analytics provider to the real estate industry. The company continues to add new services in commercial and residential real estate, which have grown its addressable market and enhanced services for its clients. This has improved client retention and cash flow. CoStar continues to invest its cash flow in its business to accelerate growth, which we believe should generate strong returns over time.”
Click to continue reading and see Bares Capital’s Top 5 Stock Picks.
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Disclosure: None. Bares Capital’s Top 12 Stock Picks is originally published on Insider Monkey.