Baron Funds, an asset management firm, published its “Baron Discovery Fund” third quarter 2021 investor letter – a copy of which can be downloaded here. A decline of 5.02% was delivered by the fund’s institutional shares for the third quarter of 2021, which was 0.63% better than the Russell 2000 Growth Index (the “Benchmark”). You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.
Baron Discovery Fund, in its Q3 2021 investor letter, mentioned Membership Collective Group Inc. (NYSE: MCG) and discussed its stance on the firm. Membership Collective Group Inc. is a United States-based holding company with a $2.5 billion market capitalization. MCG delivered a 9.77% return for the past month and it closed at $12.07 per share on November 16, 2021.
Here is what Baron Funds has to say about Membership Collective Group Inc. in its Q3 2021 investor letter:
“During the quarter, we purchased Membership Collective Group Inc. (“MCG”), a global membership platform centered around club houses in metropolitan areas. Its trademark Soho House brand has 30 Houses with more than 111,000 members globally, 94% average annual retention, and a wait list of over 59,000 people. In addition to the core Soho House brand, the company has additional membership brands including Soho Works, Scorpios Beach Club, The Ned Club as well as adjacent/digital memberships, including Soho Friends and Soho House Digital. We believe MCG has a valuable, unique business model as a scaled global membership platform. Its strong brand, evidenced by its long wait list, leads to very low marketing expenses and high retention, while also driving strong recurring revenue. There are currently 30 Soho Houses open, and 5 to 7 new openings are planned per year, providing a clear line of sight for attractive long-term growth. Over the long term, management believes they can have close to 100 houses globally.
We believe MCG’s growth pipeline, recurring revenue potential, operating leverage, and de-leveraging should drive solid financial growth in the medium
term. We expect revenue to grow at a 34% CAGR between 2021 and 2025 as it expands the number of houses, expands other membership programs, and spending per member increases. We also expect EBITDA margins to benefit from the ramp up in new houses (the company targets House-Level Contribution Margins of 20% to 30% by year five) as well as from improving operations of existing houses and leveraging corporate expense. The combination of strong top-line revenue, expanding EBITDA margins, and the potential for investors to better understand the recurring revenue business
model should result in significant shareholder value over time.”
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Based on our calculations, Membership Collective Group Inc. (NYSE: MCG) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. Membership Collective Group Inc. (NYSE: MCG) delivered a -0.98% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.