Baron Funds, an asset management firm, published its “Baron Asset Fund” second quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly return of 10.03% was delivered by the fund’s institutional shares for the Q2 of 2021, compared to its Russell Midcap Growth Index and S&P 500 benchmarks that delivered 11.07% and 8.55% returns respectively for the same period. You can take a look at the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Baron Funds, the fund mentioned Avalara, Inc. (NYSE: AVLR), and discussed its stance on the firm. Avalara, Inc. is a Seattle, Washington-based software company with a $15.7 billion market capitalization. AVLR delivered a 10.66% return since the beginning of the year, while its 12-month returns are up by 37.81%. The stock closed at $179.94 per share on August 27, 2021.
Here is what Baron Funds has to say about Avalara, Inc. in its Q2 2021 investor letter:
“This quarter we meaningfully added to our position in Avalara, Inc., a leading cloud-based provider of transactional tax automation software. Avalara operates in a large (roughly $15 billion) and relatively untapped market. We believe that the company is well positioned to benefit from several underlying secular trends. Following a recent U.S. Supreme Court ruling (Wayfair vs. South Dakota), we expect heightened regulatory scrutiny on whether companies are collecting the appropriate sales taxes in all jurisdictions in which they operate. The rise of e-commerce, which entails sales across state lines, adds further complexity to this challenge. These trends should encourage the use of software solutions, which are inherently more efficient than people-based alternatives, to manage transactional tax calculations, record keeping, and tax filings.
Avalara is the clear leader for this software among mid-market customers. Relative to its competition, we believe the company is distinguished by its deep partner integrations, strong brand reputation, deep content database, native cloud-based technology, and effective sales force. The company is operating at near break-even profitability today due to ongoing growth investments. However, we expect to see Avalara meaningfully increase its margins and generate substantial free cash flow over the long term.
We believe that Avalara is well positioned to grow its revenues by at least 25% to 30% for the next several years. We expect this to be driven by several factors, including the addition of more mid-market customers, moving its offerings up-market into enterprise-size customers, international expansion, deepening its content database, becoming a broader compliance platform, and selective acquisitions. We believe that this strong level of compounding growth will drive solid returns for the stock over a multi-year period.”
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Based on our calculations, Avalara, Inc. (NYSE: AVLR) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. AVLR was in 29 hedge fund portfolios at the end of the first half of 2021, compared to 41 funds in the previous quarter. Avalara, Inc. (NYSE: AVLR) delivered a 38.05% 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.
