Brian Bares’ Favorite Investment Reads and Favorite Stocks

In a recent interview, Brian Bares shared a list of reading materials he and his team employ in their analysis. Bares said he likes to read business biographies because the writing transmits the passion of entrepreneurs to the readers. He also believes financial books in general make for good reading, but he thinks serious investors should read “as many annual reports as possible” because they are the face of a business. Bares said he finds Berkshire Hathaway’s annual reports and partnership letters to be a great source of information that can help an investor look at stocks as business entities. Bares puts emphasis on the necessity to understand the business behind the stock in order to be successful in the market. He also identified Valueline as a key source of information for his investment team, stating that it helps them identify and track trends specific to each industry and also helps an investor understand the specifics of financial statements for all types of businesses.

Brian Bares founded Bares Capital Management in 2000 and runs it as a long-only fund. Bares Capital’s management team employs fundamental analysis with a bottom up approach to make stock picks mostly among small- and micro-cap companies. Bares Capital stands out among fellow funds as it limits the growth of assets under management to maintain a high return. At the end of the first quarter, the fund’s equity portfolio carried an estimated value of $1.38 billion and had significant exposure to technology and industrial sectors, which accounted for 35% and 32% of the portfolio respectively. So let’s take a look at the five largest equity bets Bares Capital had at the end of the quarter.

At Insider Monkey, we track around 730 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details about our small-cap strategy).

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Technology Bet

Gartner Inc (NYSE:IT) opens the top 5 positions of Bares Capital Management at the end of the first quarter. The fund’s stake in the IT research and advisory firm amounted to approximately 1.01 million shares worth $90.8 million. During the first three months of 2016, Gartner Inc (NYSE:IT) registered a boost in popularity among the funds followed by Insider Monkey. The number of long positions rose to 16 from 13 at the end of December. Robert Joseph Caruso‘s Select Equity Group increased its holding of the stock by 133% to 715,195 shares worth $63.9 million as reported in its latest 13F filing. Having traded sideways for the first fourth months, Gartner Inc (NYSE:IT) exploded in May and is up by over 10% year-to-date. The rally was triggered by the company’s first quarter results that beat analysts’ estimates. Gartner posted $557.3 million in revenues, an increase of 18% year-over-year, and adjusted earnings of $0.61 per share.

Fastenal Is Hot Among Hedge Funds

Next up is Fastenal Company (NASDAQ:FAST), a seller of of industrial and construction supplies. Bares Capital reportedly held 1.94 million shares of Fastenal worth $95.3 million at the end of the first quarter. Hedge fund sentiment towards Fastenal improved significantly as the number of long positions rose to 23 at the end of March from 13 positions registered a quarter before. William Duhamel is betting big on Fastenal Company (NASDAQ:FAST), as his fund, Route One Investment Company holds 3.51 million shares worth $172 million as of the end of the quarter. The company has a market cap of $13.4 billion and pays an annual dividend of $1.16 per share, providing a yield of 2.50%. Fastenal Company (NASDAQ:FAST) is currently trading at a trailing Price to Earnings (P/E) ratio of 26, slightly higher than the industry average of 20.5.

Head over to the next page to find out more on Bares Capital’s top three equity positions heading into Q2.

Bares and his team are very optimistic about the prospects of Platform Specialty Products Corp (NYSE:PAH) and have boosted their investment by 64% during the quarter. According to its latest 13F filing, Bares Capital holds 11.9 million shares valued at $102 million. At the end of the quarter, 41% of Platform Specialty Products Corp (NYSE:PAH) common stock was held by 22 elite hedge funds, up from 20 three months before. The company reported a loss of $135 million for the first quarter of 2016; however, when accounted for non-recurring costs, the company said it earned $0.11 per share, surpassing analysts’ expectations of $0.10 per share. Revenue came in at $824 million, up by 54% year-over-year. Billionaire Bill Ackman is also keeping an eye on the stock, with his fund, Pershing Square, holding 42.7 million shares worth $367 million at the end of March.

Bares Unsure About Interactive Intelligence

When it comes to Interactive Intelligence Group Inc (NASDAQ:ININ), Bares decided to exercise a little caution and reduced his fund’s exposure to the stock by 7% over the course of the first quarter. Valued at $107 million, Bares Capital’s stake in the provider of software and cloud services amounts to 2.95 million shares as reported in its latest 13F filing. During the first three months of this year, the number of long hedge fund positions increased to 14 from just 9 registered at the end of 2015. Whale Rock Capital Management, run by Alex Sacerdote, established a fresh position in Interactive Intelligence Group Inc (NASDAQ:ININ) that amounted to 814,641 shares valued at $29.7 million. Shares are currently trading up 41% year=to=date. Analysts at William Blair and Morgan Stanley have recently reiterated their ‘Hold’ rating on Interactive Intelligence Group Inc (NASDAQ:ININ), while the consensus price target on the stock stands at $46 per share – an upside potential of roughly 10%.

Top Dog

Colfax Corp (NYSE:CFX) remains Bares’ number one equity bet, although the fund reduced its holding by 1%. At the end of March, Bares Capital held 7.49 million shares of Colfax with an estimated value of $214 million. Charles Akre, on the other hand, increased his investment by 4% to some 7.62 million shares valued at $218 million. In contrast to the stocks discussed above, the popularity of Colfax Corp (NYSE:CFX) among the funds followed by Insider Monkey cooled down during the first quarter, as the number of funds invested fell to 24, which together held 26% of the company’s outstanding stock. The stock is currently up by 18% for the year and is trading at a P/E multiple of 25, which is significantly lower than the industry average P/E of 39. Barclays’ analysts have recently upgraded the stock to ‘Equal Weight’ from the previous rating of ‘Underweight’ and have increased the price target to $26 per share. The stock is already trading above that level, having ended yesterday’s session at $26.80 per share.

Disclosure: none.