September 30, 2025 • 33 mins
Despite tariff-related concerns, corporate earnings, especially in the S&P 500, have been stronger than expected. In this episode of Inside Active, host David Cohne, mutual-fund and active management analyst with Bloomberg Intelligence, along with co-host Michael Casper, US Small Cap and Sector Strategist at Bloomberg Intelligence spoke with Michael Lippert, Vice President and Head of Technology Research at Baron Capital and a portfolio manager for the Baron Opportunity (BIOIX) and Baron Technology (BTECX) funds about the Baron Capital philosophy, which focuses on secular growth trends with durable, compounding potential and the firm’s preference for companies that can expand into multiple growth curves. They also discussed the transformative impact of AI across industries and why physical AI is a powerful but underappreciated theme.
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Episode Transcript
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Speaker 1 (00:15):
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
their processes, challenges and philosophies and security selection. I'm David Cohne,
i lead mutual fund and active research at Bloomberg Intelligence.
Today my co host is Michael Casper, us small cap
and sector strategists at Bloomberg Intelligence. Mike, thanks for joining
(00:35):
me today.
Speaker 2 (00:36):
Thank you, David.
Speaker 3 (00:37):
So you wrote an interesting.
Speaker 1 (00:38):
Note recently on earnings fundamentals and current rally. Can you
provide no review of what earnings fundamentals are telling us
about the current bullmarket rally.
Speaker 2 (00:47):
Yeah, so, at least for the S and P five
hundred in the second quarter, it's almost like as if
Tariff's never happened. So if you went back to the
January estimate for the second quarter, it was about nine percent.
They cut that all the way down to two point
eight percent for two Q and what we ended up
with was a little over ten percent, So pretty much
(01:07):
all that tariff draw down inconsensus estimates gone, at least
for the second quarter. Back half estimates still a little
bit weaker than they were at the beginning of the year.
About half. We're looking at about seven percent growth for
the second half, But again the trend has been towards
beats for the S and P five hundred, and we
did a recent note on earning signals for stock prices
(01:29):
and what that might mean for equities going forward, And
what we're really seeing is a lot of the early
year concerns start to clear up. Right, So the bar
was incredibly high for twenty twenty five going into the year,
that again has come down considerably, making it a little
bit easier for the S and P five hundred to
beat subsequent quarters. The issue, I would say, or at
(01:50):
least the risk on the horizon, is the twenty twenty
six bar, which is well over ten percent for each
of the three quarters that we have clarity on the
last time that we've had that was twenty twenty one
and twenty eighteen, so one was post tax reform, the
other was post COVID recovery. So it's quite unusual to
have a ten percent growth backdrop without some kind of
(02:11):
recovery or fiscal policy coming through to help stocks. But
the other signs that we're watching that that have been
more constructive for socks. Earnings breadth has improved. Cyclical minus
defensive sector earnings and revenue better better than cyclicals are
looking better than defensives on that end. Revision momentum very positive,
(02:33):
and the margin outlook has been improving despite all the
terrorfs that have come down the pipe. So things looking
a lot better on the earnings front than they are
at the start of twenty five, at least after the
liberation to announcement.
Speaker 1 (02:48):
Thank you great, well, something we can watch out for.
But I'd like to seg into our today's guest to
the podcast. Michael Lippert is the vice president and head
of Technology Research at Baron Capital and the portfolio manager
for the Baron Opportunity Fund ticker bioi X and the
Baron Technology Fund ticker bt e c X. Michael, thank
(03:12):
you for joining us today.
Speaker 3 (03:13):
Thanks for having me.
Speaker 1 (03:14):
So let's start with the philosophy behind your investment decisions.
How would you define the Barren philosophy.
Speaker 3 (03:21):
Yeah, we've been in business for over forty years, founded
by Ron Baron, who's well known, and we are quint
essential long term investors. I joke with some people and
I first joined the industry. I switched careers later on
from being a lawyer to be an investor, and people
give you books. So I got a book on Warren Buffett,
and when I read Warren Buffett, who's famously a value manager,
I said, wow, this person sounds like just like Ron,
(03:44):
even though we're considered to be a growth manager. Why
we invest in businesses, not just stocks, and we try
to find great businesses run by top entrepreneurs that are
simply going to grow for a very very long time.
You know, there's the same and the short term, you know,
the market is a voting machine, and the long term
it's a weighing machine. We effectively believe in that right
(04:05):
over the long term, the market will get fat, sorry,
stocks will get fat on revenues and profits. You put
them on a scale, you put a reasonable multiple on them,
because you know, multiple in the short term is sentiment driven.
And if you find companies that can really get fat,
they're going to create great value. And if you look
over the last you know, let's just call it whatever,
forty fifty years, the Internet age. You know, the Googles,
(04:26):
the Microsofts, the Apples of the world. They basically just
kept going and going and going. And so we invest
in what we call secular growth trends or themes. These
are things that are almost undeniable Internet cloud computing. Try
to find the companies that have competitive advantages so they're
going to take market share among these trends. And just
one last point. One of the things we look at
(04:47):
we call it second or third acts, you know, second
or third s curves or multiple tams. Companies that can
do more than one thing, go from a single product
or service company to multiple product services. All come means
want to be what's called, you know, a platform company.
And you know, maybe the most famous one would be Amazon,
which started life as a you know, online bookseller, and
we know all the things that Amazon is today including aws,
(05:10):
probably its most valuable business.
Speaker 1 (05:13):
So when you're looking at these secular trends, how do
you define and validate you know that an emerging theme
is truly durable?
Speaker 3 (05:21):
Yeah, I mean it's it's honestly just just research. I
wish I could say something magic. We have a team
of over twenty you know, research professionals. Our analysts become
focused on and you know, seek to become experts in
different industries. Some industries are so complicated and so diverse
that we have multiple people on them So for example,
(05:44):
right now on AI, we have a full what we
call AI working group, people from all over the firm.
And when I think about a theme or a trend,
it's not dissimilar from a company when you learn in
business school. People can't maybe can't see the podcast, but
you know, things follow an S curve and you want
things to inflect, you know, upwards at some point, and
so we spend a lot of time trying to find,
(06:05):
you know, that inflection point. And as I was thinking
about our podcast this morning, like we're not timers, so
we don't have to exactly get it right. Oftentimes we
maybe a little bit early before the inflection point. Sometimes
we're late. However, and if you think about the inflection,
that's deep part of the growth of a big trend.
Cloud computing can last seriously twenty years. If you miss
(06:27):
the beginning, you can still participate in a long time.
So we really look at, you know, what's the driver
of that trend, what is the market backdrop, what's the
traction that it's getting, you know, what's the size of
that opportunity. You know even what it will take in
terms of human behavior, whether it's enterprise or consumer behavior
to get adoption, and we look for what I call
(06:49):
proof points, actual evidence that something you know, is getting legs.
And so you know, for example, during COVID, there were
lots of themes that people got all excited about, you
know that some of them never really picked up and
amounted into anything, but we we try to invest in
the ones that are you know, believe are real. I'm
sure we'll talk about AI and of course, you know,
(07:09):
we're now not even three years into it, we're obviously
convinced that is a real major theme and will impact
you know, every industry in the world for the next
at least twenty years will have an AI two dot
oh at some point of course. So you know, you.
Speaker 1 (07:22):
Mentioned some of the stuff that doesn't stick. So I
kind of want to follow up with, you know, how
what is it exactly that you're looking at that lets
you distinguish between short term bads and you know, something
that's going to be a lot longer term.
Speaker 3 (07:36):
Yeah, I mean, I would say there was lots of
talk about, you know, whether blockchain technology would be more
than just simply you know, supporting crypto, all the different
uses of it. I would say during COVID it was
a big move on NFTs and things like that. Even
when we think about crypto trading, you know, we looked
at some companies that were going public, and while we
(07:56):
were definitely believers that crypto trading, for example, you know,
would expand across the market and you know, lots of
self directed investors would do crypto, we didn't know that
any one particular company had a competitive advantage. We looked
at trading historically and other than like the CME for example,
that would have a future that was you know, really
developed proprietary to them. You know, everybody had trading, so
(08:19):
we looked at things like that. But again there's no
easy way. It is honestly just doing the work. And
the work for us are talking to the companies involved
that we're looking at that are you know, the leader's
pioneers for example, of a product or service, talking to
their competitive set, talking to customers. Of course, you can
do lots of polling and there's lots of data when
(08:40):
it comes to a consumer. With enterprises, again you can
go out and talk to them and again it's just
it's candidly looking for real proof points of adoption people
actually using a product or service and truly getting value
out of it, and we try to measure that and
so again I'm at a high level that but that
is what we try to do.
Speaker 1 (08:59):
So if we even take a set back further, you know,
we've talked about what you're looking for. What does the
research process look in practice? You know, where are these
ideas coming from? Is the analysts? You know, things happening
in the industry, even your own views of what's going on.
Speaker 3 (09:14):
Yeah, I mean, the true answer, David is all the above.
You know, people always ask me, you know, how you
do something. I say, listen, if we're starting the firm today,
of course my answer would be different. But We've been
in business for forty something years. I've been with Baron
for almost twenty five years now. You said, one of
my titles is head of Tech Research, and I'm always
asked what that means. It is effectively player coach. Right,
(09:36):
I'm in the field, on the field with the analysts,
but I'm a little you know, a little bit coaching
to make sure we're focused on the right things. Even
focused on the right things right now. Is not just
the right answers, of course, you want to get the
right answers, but the process of making sure you're asking
the right questions all of the things That means for
our research. I'm trying to make sure collaboration is not
(09:57):
just a word that we put on a slide deck,
but actually happens in practice. Every firm says collaboration, you
have to actually really really do it. So all of
these things are just the research. And so when it
comes to a given sector or industry, for example, it's
rare that we're surprised because we have it quote unquote
mapped out. That's my terminology. So we'll know the public companies,
(10:20):
for example, in software, we'll know the small, medium sized,
and large cap companies. We don't always think of them
in terms of market cap, but we think of them
what I call the development curve of how developed they
are as a company. Are they emerging company, are they
approven company? Are they a prospect or they im mature company.
We'll then divide up a given sector or industry by
(10:40):
different verticals and we have it mapped out. And we
also do a lot of work. Even though we don't
do a lot of private investing, we do a lot
of work meeting the private companies. Two reasons one to
get much smarter because those companies tend to be the
disruptors of the public companies. So to get much smarter
on that, we just had to trip out to the
West Coast and we met with lots and lots of
private companies. I can tell you more about that then,
of course, to meet these companies before they go public,
(11:03):
so that we know them really well when they become
a public company, and hopefully that we will get, you know,
because of the management direction, not because of a sell
side firm, a good allocation in the company that we
really want to invest in, because we've known them for
years and they see that we at Baron have made
the investment. And our reputation, of course when it comes
to private companies and IPOs is that we are long
(11:24):
term investors. So management teams would like Baron to be
involved because we're not going to you know, trade their
stock on a pop for example.
Speaker 1 (11:32):
So one of the things you mentioned earlier is, you know,
since it's long term, you're not afraid of missing the
beginning of something. But if you had the I guess
the choice, would you prefer to enter a theme early
before the business model has really been proven or kind
of wait till the company's actually demonstrated viability.
Speaker 3 (11:50):
Yeah, we tend. Of course, we'd like to be early,
right because you'll get more returns. However, we don't want
to invest in something you know, is, for example, just
a fad. It's okay if it's being in a sense
perceived not necessarily as a fad, but that you know,
someone is not. You know, there's a lot of debate
about what the adoption will be. And of course our
(12:12):
firm is well known for our investment in Tesla. My
particular portfolio first invested in Tesla in twenty twelve, so
we were very early on and of course even today
there's debate about, you know, the adoption and what the
penetration will be of electric vehicles. Back then, could you
imagine there was much more debate. So we were able
to enter at that stage of course, position our investment
(12:34):
in an appropriate size. But we were early and if
you really think about and you look at the chart
of Tesla and Ron Barren, my boss, has talked about
this a lot on TV. We owned the stock for
a lot of I owned it from twenty twelve to
twenty fourteen and got a triple and then the stock
went flat for a number of years before it inflected
up again, and so it was long term investors again
running a portfolio, we can have some stocks that go flat.
(12:57):
Another company that we were early on in frankly Envidio,
we invested in my portfolio believe it was twenty seventeen
or twenty eighteen. In Nvidia, we did not invest because
it was a you know, a gaming chip company. We
were investing against the AI m L back then machine
learning opportunity. I laughed because we were wrong. If you
look at our initial model and we thought the you know,
(13:18):
AI penetration would be for Nvidia. I mean, we were
ordered of magnitudes too low, and Nvidia just went like
this for a long long time before the jet cheap
PT inflection of course made it a great stock, and
I think it's the best performing investment in my portfolios history.
We had a full day where a team of Baron
met with Jensen in twenty eighteen. We talked about AIML
(13:40):
the entire time, and to show our investors that we
were early in the kind of work that we did.
I put literally put quotes from my notes into one
of my quarter letters to show that what we were
talking when Jensen Wang in twenty eighteen. Let's be real,
four plus years. I think I can't remember a spring
or fall, you know, before the chet cheap pt moment
of you know, November twenty two.
Speaker 1 (14:00):
So you know, you just talked about Tesla. If we
go back before the Navidia part, but you're talking about
Tesla being flat for a few years. What happens if
you know one of the companies you're invested in actually
underperforms for a while. How do you keep conviction in
that company when you you know, just knowing that it's
something in the long term.
Speaker 3 (14:18):
Listen, no portfolio. It's unrealistic to almost think that every
stock in your portfolio is going to perform at the
same time. That's why I write a portfolio. You want
to have diverse exposures for your investors. Some stocks will work,
some stocks won't work. We're not timers at Baron. We're
not market timers. We're not individual stock timers. Like colleagues
will joke at me sometime I'll read the night before
(14:40):
news and I'll tell people what I think the market
is going to do that couldn't be completely wrong. So
I'm definitely not a timer. When a stock is not working,
of course, the market is telling you something. We try
to understand what the market is telling us, and we
try to test that through our research. If the market
is you know, simply myopic or short term, that is
one thing, and we could wait. If the market, you know,
(15:01):
is telling us. And by telling us, I mean doing
that research right, understanding why a stock is underperforming in
the market, obviously, talking to the company, all the other
things that we do. If it's just adoption is taken
a little bit longer, there's been a change in the
competitive environment and industry. Some of these things are real,
which may cause us to have a different view of
(15:22):
the investment. Less in the investment, sell the investment. And
of course if a stock hasn't performed and other stocks
have performed well and the long term return opportunity is
more attractive, and we can confirm all the things that
we have in our investment fieces that will let you
know this company again be a company that's going to
get fat ultimately on profits, will increase that investment. And
(15:44):
so I won't say that both things have happened in
my career, hopefully, you know, I believe we've been more
on the right side where stocks haven't worked, and we've
been right and they eventually work, but there's no doubt
that there have been times that stocks haven't worked. We
drilled down and we ultimately decided to exit that company
because you know, when we exit, if you want to ask,
it is honestly not because stocks are going against us
(16:05):
in the market, because we conclude, based on our own
research analysis, that we've made a mistake or there's just
literally something better for us to invest in, even though
it may not be a mistake, there's just something better,
but it's never because of the trading activity.
Speaker 1 (16:19):
Okay, makes sense. I've actually just got one more question.
I know before Mike's got a few market more related questions.
But you know one other thing you like, I want
to go back to Tesla for just a second. So
if we talk about Elon, you know, you also mentioned SpaceX.
So one of the things I've always trying to figure
(16:39):
out is when you have exposure to a private company
or you know, a structured entity, how do you evaluate
those and kind of integrate those into your valuation and
risk frameworks when information is obviously not as readily available
as a public company.
Speaker 3 (16:55):
At Baron, we have an investment in SpaceX and the
Baron Opportunity Fund. SpaceX is a approximately a four and
a half percent position in the portfolio. Depending on what
happens in the market, it could go down or up.
We value it. We have a valuation committee, for example,
that does the work in terms of how we value
it in our mutual funds. There's a fairly active secondary
(17:17):
market that certainly influences our valuation for the committee. However,
as investors, we research and value SpaceX exactly the same
way that we research and value a public company. And frankly,
private companies often give you more information than you are
able to get more exposure to management because you don't
have some of the same reg fd issues. So we've
(17:39):
been investors in SpaceX for many, many years. I wish
I could recall the exact time period. I believe we
know the company very very well, just like we might
have a model on Tesla or Microsoft or Broadcom or Shopify.
Of course, we have a model on SpaceX. It's not
marked to market every single day in the market, but
we as investors of valuate it, you know, honestly, exactly
(18:01):
the same way. Some of the different risks, of course,
are liquidity risks. There's no doubt about that, and that
will inform maybe the position size we have of the company.
One of the things with a company like SpaceX, we
have no intent at Baron to use these secondary markets.
But there's you know, there is liquidity in SpaceX today
that is a little and that's evolved in the private markets.
That's a little bit different than you know, what a
(18:23):
private company might have been ten years ago. But again
for all listeners there right now, the way we see
the opportunities for SpaceX and certainly their differentiation whether it's
in satellite broadband or in the launch business, we intend
to be very long term holders of SpaceX.
Speaker 2 (18:39):
So cloud computing and software as a service adoption are maturing,
Where do you see the next wave of growth coming
from within enterprise tech?
Speaker 3 (18:46):
Yeah, you know, I saw that question in there. Mike.
If I call you Mike, I'm Mike too. I think
that the current phase that we are in is maturing,
but I think the most important thing is the next phase,
right and the next phase is artificial intelligence phase of
cloud computing. You know, we used to think we had
three what are called hyperscalers of everyone at home or
(19:08):
listening doesn't know what a hyperscaler is the three used
to be Microsoft Age or Amazon Aws and Google Cloud compute.
It's very clear from the announcements of last week we
have a number four that's Oracle, and certainly we have
what are called neo clouds companies like core Weave, and
there's just insatiable demand for power cooling and of course
(19:28):
compute to train and run running is what's called inference
AI workload. So I think cloud computing has not matured
at all, just maybe what you know CPU, you know,
central processing unit dominated by the Intel five percent market
share of AMD. That world has changed and we're now
(19:49):
in the you know, AI compute, GPU compute. People call
them accelerator world. So I think we're in the very
early stages of that and demand is literally insatiable. I'll
touch on software for a second that you can come
back with a follow up. There's been an enormous debate
in the market this year, you know, quote unquote is
software dead. We did our own piece on that and
(20:09):
all quarterly letters. We wrote a barren insight piece which
people can take a look at, and our answer was,
first of all, that's not the right question for us,
at least because we don't invest in software. We try
to invest in, you know, the software winners. Software is
obviously facing a major challenge, a major disruption. The future
of software is not simply a human being, you know,
(20:32):
dropping down, you know, like I'm in my Excel right now,
windows and things and doing something with it. Software is
shifting and it was interesting. We met with a CEO
last weekend and the way she put it is software
is sipping from like humans doing things to just work happening.
And often the work will be done by artificial intelligence,
(20:52):
will be done by agents in conjunction with human beings.
And I think more and more over time, more and
more of the work we'll be done by agents by AI,
and it will make you know, people that much more productive.
And software has always been a productivity tool. I don't
think that will change. But again, we are going through
(21:13):
a major inflection. We are going through a major change.
Some software companies will quote unquote across the chasm from
the SaaS age to the AI age. If you do
not do that, you will be disrupted. If you want
to follow up, there's lots of things that we could
talk about. What the characteristics might be of a software
company that can be successful in the AI age, and
(21:36):
I think just to put a touch on it, data
is incredibly important, proprietary data or customer data that they
could access and understanding basically what's called the context around
users and workflows. You know a term that Volunteer has
popularized called ontology. I would say they have ontology, but
when we talk to lots of other companies they talk
(21:57):
about what they're doing with the data, they talk often
about context and that is basically the same thing that
they're referring to with intology. I'm not putting down what
volunteers doing. They're doing some really interesting stuff, but that
is what people are talking about, and software companies have
that they have to capitalize on that. If they do not,
they will be disrupted.
Speaker 2 (22:14):
I'm a macro strategist at heart, so I kind of
have to ask you. I know you don't do a
lot of market timing stuff, but a lot of tech
growth is tied to the consumer, and we might be
hitting a period of economic weakness. How do you evaluate
the durability of consumer driven tech themes?
Speaker 3 (22:31):
Yeah, we look at it honestly, you know, very carefully.
We're certainly where that what we don't call the macro.
You can't work in the stock market without being you know,
cognizant of what's going on the macro. And this has
maybe been the craziest mac rea that have experienced in
my career. Like, you know, the word of the day
all year long has been uncertainty. You know, you touched
on the tariffs and the tariff's impact and what will
(22:53):
happen later in the year and did this you know,
was there a pull forward in consumer demand in the
middle of the year before taris. We've asked lots and
lots of questions on that. You know, we think about
all the time. What I call secular tocyclical, you can
call it a ratio. You can't calculate it, but qualitatively
you could understand which businesses are more secular and therefore
(23:15):
you know their business will be less disrupted by a
weak macro. And certainly some great businesses any advertising business
you know, Google or meta e commerce businesses Amazon or Shopify,
and they're all macro sensitive of course, right consumers have
to buy on their platforms, or consumers have to be
(23:35):
buying so that advertisers want to want to reach consumers.
So we're well aware of that. We have a lot
of data on of course the macro. We know what
you know comps are, you know what treat expectations are,
and of course we know what valuations are, what in
a sense being priced in for these companies. So we
are making judgments about in a sense what exposures we
want to have, and at our firm, there's no doubt
(23:58):
we want to have exposures to get what I call
secular themes. So if you think of a ratio, if
we could calculate that ratio, we want to, you know,
have as high as secular as cyclical ratios as we
possibly can. And when it comes to cyclical companies like
some of the ones I named, we're absolutely investing in
the ones that we believe are are clear leaders, you know,
with real strong and durable competitive advantages, so that you know,
(24:23):
even if there is some macro weakness, usually the strong
end up becoming stronger during a macro week week period.
Speaker 2 (24:28):
And I saw you can allocate up to thirty five
percent of the assets and bt c X to non
US securities. How do you evaluate global versus US tech opportunities?
Are there any regional themes you're particularly interested in right now?
Speaker 3 (24:42):
Yeah, so that question also, and that ticker is the
Barn Technology Fund, of which I'm co manager of. My
colleague is named Ashra Mehra. I'm gonna put that out there.
You and I co manage Baron Tech Fund. I'm the
solo manager of the Baron Opportunity Fund. It is not
very different, Mike. You know, we most AI e commerce
for example, are certainly global, even you know, you know,
(25:05):
great Chinese companies try to reach the US markets. So
when it comes to a technology trend, we evalue it
the same. There are certainly, you know, some trends go
to market. You know, product or service adoption will happen
in a more localized or regional manner, So we will
look at that go to market, that penetration, that competitive
(25:26):
environment in that way. Right, there are global companies, North
America based companies. Obviously it could be Latin America or
Asian based companies. So that part of the analysis it
is certainly, you know, quite similar. You know, we may
look at particular trends that you know, relate to you know,
Latin American for example, to pick up an e commerce,
to pick up of you know, I think neobanks are
(25:48):
doing better in markets outside of the United States. Why,
because our banking system is quite mature. We have investments
in some India businesses. And you know, local commerce, for example,
is a very big thing, which today in the US
we might experience with door dash. There are Indian players
that are doing that, and so these are there's no
(26:10):
doubt that there are some localized themes that we look at.
You know that one, for example, you know, what i'll
call local commerces is one that we're looking at in India.
Speaker 2 (26:18):
And tech valuations are obviously pretty high in aggregate and
they've dominated index returns for years. Are you worried about
a possible mean reversion where other sectors start to outperform
and how would that impact your strategy?
Speaker 3 (26:30):
Yeah, worried is a word. I'm certainly aware of it.
I think about it all the time. I've done this
now for twenty something years. I benefited from the period
of time where tech was out of favor, like coming
out of the pandemic at the end of twenty two.
You could read my quarterly letters. I don't ordinarily say, wow,
this is a massive buying opportunity, but I do price
targets in a way where I color code them and good.
(26:53):
The best color is green. The next best color is blue,
and I put in my core letters. Things are flashing
green and blue right now. Very aware of where evaluations are.
Not only do we do particular company valuations, we call
them peer group because that's what we started on, but
they're industry based and I know exactly where, and everybody
in my seat should know that. You know, because the
(27:13):
data is available. You know where software companies have traded
at over time versus growth rate, versus margins, where cloud
computing companies have traded over time internet companies. So we're
quite aware of that. You know, we you can graph
all these things, you can look at you know, you
know where you are within the range. There's no doubt
that there are some, you know, certainly companies that are
that are quite expensive. Honestly, we do take that into account.
(27:37):
I'm not allowed to name particular trades, but you know,
earlier this year we made a cybersecurity trade. We had
a company that was a fantastic winner, but we were
able to shift it into you know, that's a little
bit less developed, lower market cap company that we also
perceived as a winner. And basically, you know, we were
trading about ten multiple points for that the company we
ended up getting into ended up being acquired, so that
(27:59):
was a nice risus. But we're not always making those trades.
And when I think about it, I really don't look
at I'm well aware of the one year or two
year forward multiple. The question is how much money can
we make over the long term? And at Baron we
look in four or five year time periods and then
we stack them continuously on top of each other. So
how much money can I make in a four or
(28:19):
five year time period? Basically our goal is to look
for a fifteen percent annualized return. I want a little
bit better than that. We know, sometimes I'm going to
use my hand that stocks or sometimes you know, if
you plot that line, sometimes they're above, sometimes they're below.
We also look at downside risk, and downside risk is
also often multiple contraction, you know, from something going on,
(28:40):
you know with the market. Of course we had that around,
you know that, you know, the tax or sorry, tariff
for you know what people call liberation. To hate that
term because it didn't feel so liberating to me, but
you know, the tariff period, and so all of these
things are taken into account in our portfolio management in
terms of position sizing, what exposures you want to have
(29:00):
in our portfolio. So it's absolutely not ignored. But to
be clear to anyone at Barn Capital, you know, we're
mostly focused on the long term. We want to invest
in companies that we believe with the long term winners
because they have durable competitive advantages. And we will not
over emphasize, like you know, a meaningful short term move
in the stock price if we think the long term
opportunity is still very, very attractive.
Speaker 2 (29:21):
And what's one theme you think is really underappreciated by
the market today.
Speaker 3 (29:24):
Wow, that's a that's an excellent question. One theme that
is under appreciated, I will probably say it's talked about,
but I'm not sure how appreciated is what I'll call
physical AI. Physical AI can be lots and lots of forms,
the ones that are you know, and lots of people's faces.
Of course, are you know what Tesla calls full self driving,
(29:46):
others called autonomous driving. I just came from San Francisco
and we drove around Weymos right, and Testa is now
rolling at robotaxi. I couldn't get a robotaxi because they
they wouldn't let me take when I didn't sign up
early enough. Of course, robotics right what Tessa's doing again
with Optimists and others are but there's other things. We
have a company called Somsara that we have invested in.
(30:06):
Their ticker is IoT Internet of Things because they are
trying to bring artificial intelligence to the physical world. So
they you know, they're doing with vehicles, vehicle safety, vehicle telematics,
but they also have a really strong growth business in
all other types of physical assets that they can monitor
(30:28):
for location. They're doing tanks for fill rates and all
these other things. And they sat on their last conference
call and it was in their corely letter like you
can't train your models on stuff for the Internet for
what we do, so it's very distinct. So I would
say physical AI in all forms, not only autonomous driving
and robotics for people are things that people should watch
out for. I can name a lot of others. I
(30:50):
think AI and healthcare will also be a massive theme
as well. I want to put that in there.
Speaker 2 (30:55):
And is there an under the radar secular theme you
believe can emerge as a core opportunity over the next
decade or so?
Speaker 3 (31:01):
Hard to say, the markets. The market's you know, obviously
pretty smart. The question, you know, at any point is valuation.
I think a lot of the AI themes the market
was uncertain. Certainly there was a scare around Deep Seek.
Most of those themes are being played today. I thought
you guys would ask me about Sam Altman's comment about
(31:23):
the bubble. I think, you know, if you honestly listen
to what Sam was really saying, he was saying, not
all of AI is a bubble. You know, if you've
seen the you know, information reports, they're going to have
to raise one hundred and fifteen billion over the next
I can't remember four or five years. So certainly they're
not making the argument that, you know, chat ept is
a bubble, but that there are probably other companies that
(31:43):
have bubble. I don't dispute that there was some bubble somewhere.
I don't know that much is missed today when we
think about artificial intelligence. To be candid, it's gonna affect
every area you know, of the economy, and so you know,
it's going to be software, it's going to be consumer application,
it's going to be the infrastructure, it's going to be
the energy, infrastructure, I'm trying to think of one that
(32:05):
I think has completely missed today. I think, honestly slower
right now is probably the impact that artificial intelligence will
have in healthcare. We have a few small investments are
certainly very interesting private companies. It takes a little bit
longer in that space because of course, you know, AI
is not always you know, perfectly correct right. It's probabilistic
(32:29):
versus what's called deterministic. In healthcare, you need to be right.
So I think it'll take a little bit longer for adoption,
but I think it will. It will really impact healthcare.
We have some small investments there in that space, and
we're watching it really really carefully.
Speaker 1 (32:43):
Well be something I'll watch out clar But we have
to end here, unfortunately, but this was a great conversation, Michael,
Thank you so much for joining.
Speaker 3 (32:51):
Us, both of you, David and Michael, thanks for having me.
I appreciate it.
Speaker 1 (32:55):
Thank you both, and thanks Mike for being my cost Yeah,
thank you both, and I want to thank you for listening.
If you liked the episode, please subscribe and leave a review. Also,
if you'd like to see more of our research on
the Bloomberg terminal, go to BI fund Go and b
I S t o x go Until our next episode.
This is David Phone with inside out
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
their processes, challenges and philosophies and security selection. I'm David Cohne,
i lead mutual fund and active research at Bloomberg Intelligence.
Today my co host is Michael Casper, us small cap
and sector strategists at Bloomberg Intelligence. Mike, thanks for joining
(00:35):
me today.
Speaker 2 (00:36):
Thank you, David.
Speaker 3 (00:37):
So you wrote an interesting.
Speaker 1 (00:38):
Note recently on earnings fundamentals and current rally. Can you
provide no review of what earnings fundamentals are telling us
about the current bullmarket rally.
Speaker 2 (00:47):
Yeah, so, at least for the S and P five
hundred in the second quarter, it's almost like as if
Tariff's never happened. So if you went back to the
January estimate for the second quarter, it was about nine percent.
They cut that all the way down to two point
eight percent for two Q and what we ended up
with was a little over ten percent, So pretty much
(01:07):
all that tariff draw down inconsensus estimates gone, at least
for the second quarter. Back half estimates still a little
bit weaker than they were at the beginning of the year.
About half. We're looking at about seven percent growth for
the second half, But again the trend has been towards
beats for the S and P five hundred, and we
did a recent note on earning signals for stock prices
(01:29):
and what that might mean for equities going forward, And
what we're really seeing is a lot of the early
year concerns start to clear up. Right, So the bar
was incredibly high for twenty twenty five going into the year,
that again has come down considerably, making it a little
bit easier for the S and P five hundred to
beat subsequent quarters. The issue, I would say, or at
(01:50):
least the risk on the horizon, is the twenty twenty
six bar, which is well over ten percent for each
of the three quarters that we have clarity on the
last time that we've had that was twenty twenty one
and twenty eighteen, so one was post tax reform, the
other was post COVID recovery. So it's quite unusual to
have a ten percent growth backdrop without some kind of
(02:11):
recovery or fiscal policy coming through to help stocks. But
the other signs that we're watching that that have been
more constructive for socks. Earnings breadth has improved. Cyclical minus
defensive sector earnings and revenue better better than cyclicals are
looking better than defensives on that end. Revision momentum very positive,
(02:33):
and the margin outlook has been improving despite all the
terrorfs that have come down the pipe. So things looking
a lot better on the earnings front than they are
at the start of twenty five, at least after the
liberation to announcement.
Speaker 1 (02:48):
Thank you great, well, something we can watch out for.
But I'd like to seg into our today's guest to
the podcast. Michael Lippert is the vice president and head
of Technology Research at Baron Capital and the portfolio manager
for the Baron Opportunity Fund ticker bioi X and the
Baron Technology Fund ticker bt e c X. Michael, thank
(03:12):
you for joining us today.
Speaker 3 (03:13):
Thanks for having me.
Speaker 1 (03:14):
So let's start with the philosophy behind your investment decisions.
How would you define the Barren philosophy.
Speaker 3 (03:21):
Yeah, we've been in business for over forty years, founded
by Ron Baron, who's well known, and we are quint
essential long term investors. I joke with some people and
I first joined the industry. I switched careers later on
from being a lawyer to be an investor, and people
give you books. So I got a book on Warren Buffett,
and when I read Warren Buffett, who's famously a value manager,
I said, wow, this person sounds like just like Ron,
(03:44):
even though we're considered to be a growth manager. Why
we invest in businesses, not just stocks, and we try
to find great businesses run by top entrepreneurs that are
simply going to grow for a very very long time.
You know, there's the same and the short term, you know,
the market is a voting machine, and the long term
it's a weighing machine. We effectively believe in that right
(04:05):
over the long term, the market will get fat, sorry,
stocks will get fat on revenues and profits. You put
them on a scale, you put a reasonable multiple on them,
because you know, multiple in the short term is sentiment driven.
And if you find companies that can really get fat,
they're going to create great value. And if you look
over the last you know, let's just call it whatever,
forty fifty years, the Internet age. You know, the Googles,
(04:26):
the Microsofts, the Apples of the world. They basically just
kept going and going and going. And so we invest
in what we call secular growth trends or themes. These
are things that are almost undeniable Internet cloud computing. Try
to find the companies that have competitive advantages so they're
going to take market share among these trends. And just
one last point. One of the things we look at
(04:47):
we call it second or third acts, you know, second
or third s curves or multiple tams. Companies that can
do more than one thing, go from a single product
or service company to multiple product services. All come means
want to be what's called, you know, a platform company.
And you know, maybe the most famous one would be Amazon,
which started life as a you know, online bookseller, and
we know all the things that Amazon is today including aws,
(05:10):
probably its most valuable business.
Speaker 1 (05:13):
So when you're looking at these secular trends, how do
you define and validate you know that an emerging theme
is truly durable?
Speaker 3 (05:21):
Yeah, I mean it's it's honestly just just research. I
wish I could say something magic. We have a team
of over twenty you know, research professionals. Our analysts become
focused on and you know, seek to become experts in
different industries. Some industries are so complicated and so diverse
that we have multiple people on them So for example,
(05:44):
right now on AI, we have a full what we
call AI working group, people from all over the firm.
And when I think about a theme or a trend,
it's not dissimilar from a company when you learn in
business school. People can't maybe can't see the podcast, but
you know, things follow an S curve and you want
things to inflect, you know, upwards at some point, and
so we spend a lot of time trying to find,
(06:05):
you know, that inflection point. And as I was thinking
about our podcast this morning, like we're not timers, so
we don't have to exactly get it right. Oftentimes we
maybe a little bit early before the inflection point. Sometimes
we're late. However, and if you think about the inflection,
that's deep part of the growth of a big trend.
Cloud computing can last seriously twenty years. If you miss
(06:27):
the beginning, you can still participate in a long time.
So we really look at, you know, what's the driver
of that trend, what is the market backdrop, what's the
traction that it's getting, you know, what's the size of
that opportunity. You know even what it will take in
terms of human behavior, whether it's enterprise or consumer behavior
to get adoption, and we look for what I call
(06:49):
proof points, actual evidence that something you know, is getting legs.
And so you know, for example, during COVID, there were
lots of themes that people got all excited about, you
know that some of them never really picked up and
amounted into anything, but we we try to invest in
the ones that are you know, believe are real. I'm
sure we'll talk about AI and of course, you know,
(07:09):
we're now not even three years into it, we're obviously
convinced that is a real major theme and will impact
you know, every industry in the world for the next
at least twenty years will have an AI two dot
oh at some point of course. So you know, you.
Speaker 1 (07:22):
Mentioned some of the stuff that doesn't stick. So I
kind of want to follow up with, you know, how
what is it exactly that you're looking at that lets
you distinguish between short term bads and you know, something
that's going to be a lot longer term.
Speaker 3 (07:36):
Yeah, I mean, I would say there was lots of
talk about, you know, whether blockchain technology would be more
than just simply you know, supporting crypto, all the different
uses of it. I would say during COVID it was
a big move on NFTs and things like that. Even
when we think about crypto trading, you know, we looked
at some companies that were going public, and while we
(07:56):
were definitely believers that crypto trading, for example, you know,
would expand across the market and you know, lots of
self directed investors would do crypto, we didn't know that
any one particular company had a competitive advantage. We looked
at trading historically and other than like the CME for example,
that would have a future that was you know, really
developed proprietary to them. You know, everybody had trading, so
(08:19):
we looked at things like that. But again there's no
easy way. It is honestly just doing the work. And
the work for us are talking to the companies involved
that we're looking at that are you know, the leader's
pioneers for example, of a product or service, talking to
their competitive set, talking to customers. Of course, you can
do lots of polling and there's lots of data when
(08:40):
it comes to a consumer. With enterprises, again you can
go out and talk to them and again it's just
it's candidly looking for real proof points of adoption people
actually using a product or service and truly getting value
out of it, and we try to measure that and
so again I'm at a high level that but that
is what we try to do.
Speaker 1 (08:59):
So if we even take a set back further, you know,
we've talked about what you're looking for. What does the
research process look in practice? You know, where are these
ideas coming from? Is the analysts? You know, things happening
in the industry, even your own views of what's going on.
Speaker 3 (09:14):
Yeah, I mean, the true answer, David is all the above.
You know, people always ask me, you know, how you
do something. I say, listen, if we're starting the firm today,
of course my answer would be different. But We've been
in business for forty something years. I've been with Baron
for almost twenty five years now. You said, one of
my titles is head of Tech Research, and I'm always
asked what that means. It is effectively player coach. Right,
(09:36):
I'm in the field, on the field with the analysts,
but I'm a little you know, a little bit coaching
to make sure we're focused on the right things. Even
focused on the right things right now. Is not just
the right answers, of course, you want to get the
right answers, but the process of making sure you're asking
the right questions all of the things That means for
our research. I'm trying to make sure collaboration is not
(09:57):
just a word that we put on a slide deck,
but actually happens in practice. Every firm says collaboration, you
have to actually really really do it. So all of
these things are just the research. And so when it
comes to a given sector or industry, for example, it's
rare that we're surprised because we have it quote unquote
mapped out. That's my terminology. So we'll know the public companies,
(10:20):
for example, in software, we'll know the small, medium sized,
and large cap companies. We don't always think of them
in terms of market cap, but we think of them
what I call the development curve of how developed they
are as a company. Are they emerging company, are they
approven company? Are they a prospect or they im mature company.
We'll then divide up a given sector or industry by
(10:40):
different verticals and we have it mapped out. And we
also do a lot of work. Even though we don't
do a lot of private investing, we do a lot
of work meeting the private companies. Two reasons one to
get much smarter because those companies tend to be the
disruptors of the public companies. So to get much smarter
on that, we just had to trip out to the
West Coast and we met with lots and lots of
private companies. I can tell you more about that then,
of course, to meet these companies before they go public,
(11:03):
so that we know them really well when they become
a public company, and hopefully that we will get, you know,
because of the management direction, not because of a sell
side firm, a good allocation in the company that we
really want to invest in, because we've known them for
years and they see that we at Baron have made
the investment. And our reputation, of course when it comes
to private companies and IPOs is that we are long
(11:24):
term investors. So management teams would like Baron to be
involved because we're not going to you know, trade their
stock on a pop for example.
Speaker 1 (11:32):
So one of the things you mentioned earlier is, you know,
since it's long term, you're not afraid of missing the
beginning of something. But if you had the I guess
the choice, would you prefer to enter a theme early
before the business model has really been proven or kind
of wait till the company's actually demonstrated viability.
Speaker 3 (11:50):
Yeah, we tend. Of course, we'd like to be early,
right because you'll get more returns. However, we don't want
to invest in something you know, is, for example, just
a fad. It's okay if it's being in a sense
perceived not necessarily as a fad, but that you know,
someone is not. You know, there's a lot of debate
about what the adoption will be. And of course our
(12:12):
firm is well known for our investment in Tesla. My
particular portfolio first invested in Tesla in twenty twelve, so
we were very early on and of course even today
there's debate about, you know, the adoption and what the
penetration will be of electric vehicles. Back then, could you
imagine there was much more debate. So we were able
to enter at that stage of course, position our investment
(12:34):
in an appropriate size. But we were early and if
you really think about and you look at the chart
of Tesla and Ron Barren, my boss, has talked about
this a lot on TV. We owned the stock for
a lot of I owned it from twenty twelve to
twenty fourteen and got a triple and then the stock
went flat for a number of years before it inflected
up again, and so it was long term investors again
running a portfolio, we can have some stocks that go flat.
(12:57):
Another company that we were early on in frankly Envidio,
we invested in my portfolio believe it was twenty seventeen
or twenty eighteen. In Nvidia, we did not invest because
it was a you know, a gaming chip company. We
were investing against the AI m L back then machine
learning opportunity. I laughed because we were wrong. If you
look at our initial model and we thought the you know,
(13:18):
AI penetration would be for Nvidia. I mean, we were
ordered of magnitudes too low, and Nvidia just went like
this for a long long time before the jet cheap
PT inflection of course made it a great stock, and
I think it's the best performing investment in my portfolios history.
We had a full day where a team of Baron
met with Jensen in twenty eighteen. We talked about AIML
(13:40):
the entire time, and to show our investors that we
were early in the kind of work that we did.
I put literally put quotes from my notes into one
of my quarter letters to show that what we were
talking when Jensen Wang in twenty eighteen. Let's be real,
four plus years. I think I can't remember a spring
or fall, you know, before the chet cheap pt moment
of you know, November twenty two.
Speaker 1 (14:00):
So you know, you just talked about Tesla. If we
go back before the Navidia part, but you're talking about
Tesla being flat for a few years. What happens if
you know one of the companies you're invested in actually
underperforms for a while. How do you keep conviction in
that company when you you know, just knowing that it's
something in the long term.
Speaker 3 (14:18):
Listen, no portfolio. It's unrealistic to almost think that every
stock in your portfolio is going to perform at the
same time. That's why I write a portfolio. You want
to have diverse exposures for your investors. Some stocks will work,
some stocks won't work. We're not timers at Baron. We're
not market timers. We're not individual stock timers. Like colleagues
will joke at me sometime I'll read the night before
(14:40):
news and I'll tell people what I think the market
is going to do that couldn't be completely wrong. So
I'm definitely not a timer. When a stock is not working,
of course, the market is telling you something. We try
to understand what the market is telling us, and we
try to test that through our research. If the market
is you know, simply myopic or short term, that is
one thing, and we could wait. If the market, you know,
(15:01):
is telling us. And by telling us, I mean doing
that research right, understanding why a stock is underperforming in
the market, obviously, talking to the company, all the other
things that we do. If it's just adoption is taken
a little bit longer, there's been a change in the
competitive environment and industry. Some of these things are real,
which may cause us to have a different view of
(15:22):
the investment. Less in the investment, sell the investment. And
of course if a stock hasn't performed and other stocks
have performed well and the long term return opportunity is
more attractive, and we can confirm all the things that
we have in our investment fieces that will let you
know this company again be a company that's going to
get fat ultimately on profits, will increase that investment. And
(15:44):
so I won't say that both things have happened in
my career, hopefully, you know, I believe we've been more
on the right side where stocks haven't worked, and we've
been right and they eventually work, but there's no doubt
that there have been times that stocks haven't worked. We
drilled down and we ultimately decided to exit that company
because you know, when we exit, if you want to ask,
it is honestly not because stocks are going against us
(16:05):
in the market, because we conclude, based on our own
research analysis, that we've made a mistake or there's just
literally something better for us to invest in, even though
it may not be a mistake, there's just something better,
but it's never because of the trading activity.
Speaker 1 (16:19):
Okay, makes sense. I've actually just got one more question.
I know before Mike's got a few market more related questions.
But you know one other thing you like, I want
to go back to Tesla for just a second. So
if we talk about Elon, you know, you also mentioned SpaceX.
So one of the things I've always trying to figure
(16:39):
out is when you have exposure to a private company
or you know, a structured entity, how do you evaluate
those and kind of integrate those into your valuation and
risk frameworks when information is obviously not as readily available
as a public company.
Speaker 3 (16:55):
At Baron, we have an investment in SpaceX and the
Baron Opportunity Fund. SpaceX is a approximately a four and
a half percent position in the portfolio. Depending on what
happens in the market, it could go down or up.
We value it. We have a valuation committee, for example,
that does the work in terms of how we value
it in our mutual funds. There's a fairly active secondary
(17:17):
market that certainly influences our valuation for the committee. However,
as investors, we research and value SpaceX exactly the same
way that we research and value a public company. And frankly,
private companies often give you more information than you are
able to get more exposure to management because you don't
have some of the same reg fd issues. So we've
(17:39):
been investors in SpaceX for many, many years. I wish
I could recall the exact time period. I believe we
know the company very very well, just like we might
have a model on Tesla or Microsoft or Broadcom or Shopify.
Of course, we have a model on SpaceX. It's not
marked to market every single day in the market, but
we as investors of valuate it, you know, honestly, exactly
(18:01):
the same way. Some of the different risks, of course,
are liquidity risks. There's no doubt about that, and that
will inform maybe the position size we have of the company.
One of the things with a company like SpaceX, we
have no intent at Baron to use these secondary markets.
But there's you know, there is liquidity in SpaceX today
that is a little and that's evolved in the private markets.
That's a little bit different than you know, what a
(18:23):
private company might have been ten years ago. But again
for all listeners there right now, the way we see
the opportunities for SpaceX and certainly their differentiation whether it's
in satellite broadband or in the launch business, we intend
to be very long term holders of SpaceX.
Speaker 2 (18:39):
So cloud computing and software as a service adoption are maturing,
Where do you see the next wave of growth coming
from within enterprise tech?
Speaker 3 (18:46):
Yeah, you know, I saw that question in there. Mike.
If I call you Mike, I'm Mike too. I think
that the current phase that we are in is maturing,
but I think the most important thing is the next phase,
right and the next phase is artificial intelligence phase of
cloud computing. You know, we used to think we had
three what are called hyperscalers of everyone at home or
(19:08):
listening doesn't know what a hyperscaler is the three used
to be Microsoft Age or Amazon Aws and Google Cloud compute.
It's very clear from the announcements of last week we
have a number four that's Oracle, and certainly we have
what are called neo clouds companies like core Weave, and
there's just insatiable demand for power cooling and of course
(19:28):
compute to train and run running is what's called inference
AI workload. So I think cloud computing has not matured
at all, just maybe what you know CPU, you know,
central processing unit dominated by the Intel five percent market
share of AMD. That world has changed and we're now
(19:49):
in the you know, AI compute, GPU compute. People call
them accelerator world. So I think we're in the very
early stages of that and demand is literally insatiable. I'll
touch on software for a second that you can come
back with a follow up. There's been an enormous debate
in the market this year, you know, quote unquote is
software dead. We did our own piece on that and
(20:09):
all quarterly letters. We wrote a barren insight piece which
people can take a look at, and our answer was,
first of all, that's not the right question for us,
at least because we don't invest in software. We try
to invest in, you know, the software winners. Software is
obviously facing a major challenge, a major disruption. The future
of software is not simply a human being, you know,
(20:32):
dropping down, you know, like I'm in my Excel right now,
windows and things and doing something with it. Software is
shifting and it was interesting. We met with a CEO
last weekend and the way she put it is software
is sipping from like humans doing things to just work happening.
And often the work will be done by artificial intelligence,
(20:52):
will be done by agents in conjunction with human beings.
And I think more and more over time, more and
more of the work we'll be done by agents by AI,
and it will make you know, people that much more productive.
And software has always been a productivity tool. I don't
think that will change. But again, we are going through
(21:13):
a major inflection. We are going through a major change.
Some software companies will quote unquote across the chasm from
the SaaS age to the AI age. If you do
not do that, you will be disrupted. If you want
to follow up, there's lots of things that we could
talk about. What the characteristics might be of a software
company that can be successful in the AI age, and
(21:36):
I think just to put a touch on it, data
is incredibly important, proprietary data or customer data that they
could access and understanding basically what's called the context around
users and workflows. You know a term that Volunteer has
popularized called ontology. I would say they have ontology, but
when we talk to lots of other companies they talk
(21:57):
about what they're doing with the data, they talk often
about context and that is basically the same thing that
they're referring to with intology. I'm not putting down what
volunteers doing. They're doing some really interesting stuff, but that
is what people are talking about, and software companies have
that they have to capitalize on that. If they do not,
they will be disrupted.
Speaker 2 (22:14):
I'm a macro strategist at heart, so I kind of
have to ask you. I know you don't do a
lot of market timing stuff, but a lot of tech
growth is tied to the consumer, and we might be
hitting a period of economic weakness. How do you evaluate
the durability of consumer driven tech themes?
Speaker 3 (22:31):
Yeah, we look at it honestly, you know, very carefully.
We're certainly where that what we don't call the macro.
You can't work in the stock market without being you know,
cognizant of what's going on the macro. And this has
maybe been the craziest mac rea that have experienced in
my career. Like, you know, the word of the day
all year long has been uncertainty. You know, you touched
on the tariffs and the tariff's impact and what will
(22:53):
happen later in the year and did this you know,
was there a pull forward in consumer demand in the
middle of the year before taris. We've asked lots and
lots of questions on that. You know, we think about
all the time. What I call secular tocyclical, you can
call it a ratio. You can't calculate it, but qualitatively
you could understand which businesses are more secular and therefore
(23:15):
you know their business will be less disrupted by a
weak macro. And certainly some great businesses any advertising business
you know, Google or meta e commerce businesses Amazon or Shopify,
and they're all macro sensitive of course, right consumers have
to buy on their platforms, or consumers have to be
(23:35):
buying so that advertisers want to want to reach consumers.
So we're well aware of that. We have a lot
of data on of course the macro. We know what
you know comps are, you know what treat expectations are,
and of course we know what valuations are, what in
a sense being priced in for these companies. So we
are making judgments about in a sense what exposures we
want to have, and at our firm, there's no doubt
(23:58):
we want to have exposures to get what I call
secular themes. So if you think of a ratio, if
we could calculate that ratio, we want to, you know,
have as high as secular as cyclical ratios as we
possibly can. And when it comes to cyclical companies like
some of the ones I named, we're absolutely investing in
the ones that we believe are are clear leaders, you know,
with real strong and durable competitive advantages, so that you know,
(24:23):
even if there is some macro weakness, usually the strong
end up becoming stronger during a macro week week period.
Speaker 2 (24:28):
And I saw you can allocate up to thirty five
percent of the assets and bt c X to non
US securities. How do you evaluate global versus US tech opportunities?
Are there any regional themes you're particularly interested in right now?
Speaker 3 (24:42):
Yeah, so that question also, and that ticker is the
Barn Technology Fund, of which I'm co manager of. My
colleague is named Ashra Mehra. I'm gonna put that out there.
You and I co manage Baron Tech Fund. I'm the
solo manager of the Baron Opportunity Fund. It is not
very different, Mike. You know, we most AI e commerce
for example, are certainly global, even you know, you know,
(25:05):
great Chinese companies try to reach the US markets. So
when it comes to a technology trend, we evalue it
the same. There are certainly, you know, some trends go
to market. You know, product or service adoption will happen
in a more localized or regional manner, So we will
look at that go to market, that penetration, that competitive
(25:26):
environment in that way. Right, there are global companies, North
America based companies. Obviously it could be Latin America or
Asian based companies. So that part of the analysis it
is certainly, you know, quite similar. You know, we may
look at particular trends that you know, relate to you know,
Latin American for example, to pick up an e commerce,
to pick up of you know, I think neobanks are
(25:48):
doing better in markets outside of the United States. Why,
because our banking system is quite mature. We have investments
in some India businesses. And you know, local commerce, for example,
is a very big thing, which today in the US
we might experience with door dash. There are Indian players
that are doing that, and so these are there's no
(26:10):
doubt that there are some localized themes that we look at.
You know that one, for example, you know, what i'll
call local commerces is one that we're looking at in India.
Speaker 2 (26:18):
And tech valuations are obviously pretty high in aggregate and
they've dominated index returns for years. Are you worried about
a possible mean reversion where other sectors start to outperform
and how would that impact your strategy?
Speaker 3 (26:30):
Yeah, worried is a word. I'm certainly aware of it.
I think about it all the time. I've done this
now for twenty something years. I benefited from the period
of time where tech was out of favor, like coming
out of the pandemic at the end of twenty two.
You could read my quarterly letters. I don't ordinarily say, wow,
this is a massive buying opportunity, but I do price
targets in a way where I color code them and good.
(26:53):
The best color is green. The next best color is blue,
and I put in my core letters. Things are flashing
green and blue right now. Very aware of where evaluations are.
Not only do we do particular company valuations, we call
them peer group because that's what we started on, but
they're industry based and I know exactly where, and everybody
in my seat should know that. You know, because the
(27:13):
data is available. You know where software companies have traded
at over time versus growth rate, versus margins, where cloud
computing companies have traded over time internet companies. So we're
quite aware of that. You know, we you can graph
all these things, you can look at you know, you
know where you are within the range. There's no doubt
that there are some, you know, certainly companies that are
that are quite expensive. Honestly, we do take that into account.
(27:37):
I'm not allowed to name particular trades, but you know,
earlier this year we made a cybersecurity trade. We had
a company that was a fantastic winner, but we were
able to shift it into you know, that's a little
bit less developed, lower market cap company that we also
perceived as a winner. And basically, you know, we were
trading about ten multiple points for that the company we
ended up getting into ended up being acquired, so that
(27:59):
was a nice risus. But we're not always making those trades.
And when I think about it, I really don't look
at I'm well aware of the one year or two
year forward multiple. The question is how much money can
we make over the long term? And at Baron we
look in four or five year time periods and then
we stack them continuously on top of each other. So
how much money can I make in a four or
(28:19):
five year time period? Basically our goal is to look
for a fifteen percent annualized return. I want a little
bit better than that. We know, sometimes I'm going to
use my hand that stocks or sometimes you know, if
you plot that line, sometimes they're above, sometimes they're below.
We also look at downside risk, and downside risk is
also often multiple contraction, you know, from something going on,
(28:40):
you know with the market. Of course we had that around,
you know that, you know, the tax or sorry, tariff
for you know what people call liberation. To hate that
term because it didn't feel so liberating to me, but
you know, the tariff period, and so all of these
things are taken into account in our portfolio management in
terms of position sizing, what exposures you want to have
(29:00):
in our portfolio. So it's absolutely not ignored. But to
be clear to anyone at Barn Capital, you know, we're
mostly focused on the long term. We want to invest
in companies that we believe with the long term winners
because they have durable competitive advantages. And we will not
over emphasize, like you know, a meaningful short term move
in the stock price if we think the long term
opportunity is still very, very attractive.
Speaker 2 (29:21):
And what's one theme you think is really underappreciated by
the market today.
Speaker 3 (29:24):
Wow, that's a that's an excellent question. One theme that
is under appreciated, I will probably say it's talked about,
but I'm not sure how appreciated is what I'll call
physical AI. Physical AI can be lots and lots of forms,
the ones that are you know, and lots of people's faces.
Of course, are you know what Tesla calls full self driving,
(29:46):
others called autonomous driving. I just came from San Francisco
and we drove around Weymos right, and Testa is now
rolling at robotaxi. I couldn't get a robotaxi because they
they wouldn't let me take when I didn't sign up
early enough. Of course, robotics right what Tessa's doing again
with Optimists and others are but there's other things. We
have a company called Somsara that we have invested in.
(30:06):
Their ticker is IoT Internet of Things because they are
trying to bring artificial intelligence to the physical world. So
they you know, they're doing with vehicles, vehicle safety, vehicle telematics,
but they also have a really strong growth business in
all other types of physical assets that they can monitor
(30:28):
for location. They're doing tanks for fill rates and all
these other things. And they sat on their last conference
call and it was in their corely letter like you
can't train your models on stuff for the Internet for
what we do, so it's very distinct. So I would
say physical AI in all forms, not only autonomous driving
and robotics for people are things that people should watch
out for. I can name a lot of others. I
(30:50):
think AI and healthcare will also be a massive theme
as well. I want to put that in there.
Speaker 2 (30:55):
And is there an under the radar secular theme you
believe can emerge as a core opportunity over the next
decade or so?
Speaker 3 (31:01):
Hard to say, the markets. The market's you know, obviously
pretty smart. The question, you know, at any point is valuation.
I think a lot of the AI themes the market
was uncertain. Certainly there was a scare around Deep Seek.
Most of those themes are being played today. I thought
you guys would ask me about Sam Altman's comment about
(31:23):
the bubble. I think, you know, if you honestly listen
to what Sam was really saying, he was saying, not
all of AI is a bubble. You know, if you've
seen the you know, information reports, they're going to have
to raise one hundred and fifteen billion over the next
I can't remember four or five years. So certainly they're
not making the argument that, you know, chat ept is
a bubble, but that there are probably other companies that
(31:43):
have bubble. I don't dispute that there was some bubble somewhere.
I don't know that much is missed today when we
think about artificial intelligence. To be candid, it's gonna affect
every area you know, of the economy, and so you know,
it's going to be software, it's going to be consumer application,
it's going to be the infrastructure, it's going to be
the energy, infrastructure, I'm trying to think of one that
(32:05):
I think has completely missed today. I think, honestly slower
right now is probably the impact that artificial intelligence will
have in healthcare. We have a few small investments are
certainly very interesting private companies. It takes a little bit
longer in that space because of course, you know, AI
is not always you know, perfectly correct right. It's probabilistic
(32:29):
versus what's called deterministic. In healthcare, you need to be right.
So I think it'll take a little bit longer for adoption,
but I think it will. It will really impact healthcare.
We have some small investments there in that space, and
we're watching it really really carefully.
Speaker 1 (32:43):
Well be something I'll watch out clar But we have
to end here, unfortunately, but this was a great conversation, Michael,
Thank you so much for joining.
Speaker 3 (32:51):
Us, both of you, David and Michael, thanks for having me.
I appreciate it.
Speaker 1 (32:55):
Thank you both, and thanks Mike for being my cost Yeah,
thank you both, and I want to thank you for listening.
If you liked the episode, please subscribe and leave a review. Also,
if you'd like to see more of our research on
the Bloomberg terminal, go to BI fund Go and b
I S t o x go Until our next episode.
This is David Phone with inside out
Host
Gina Martin Adams
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