Why Tesla Stock Will Triple, 4 Stocks With Major Upside, David Baron – Business Insider

  • David Baron co-manages a $745 million growth fund alongside his dad, billionaire investor Ron Baron.
  • The Barons made 25x on their initial Tesla investment, and David says it could triple from here.
  • He shares 4 picks from the portfolio that offer significant upside in the coming years.

Investors are often told to diversify to secure the best returns, but the Baron family found success in concentration.

In 1982, Ron Baron launched Baron Capital with just $10 million under management. It’s now a $49 billion behemoth offering 17 different funds for investors to choose from.

The asset accumulation occurred as Baron became known for his ability to win big by placing long-term bets on a small set of companies.

One of Baron’s big winners was Tesla, which was first added to the Focused Growth fund in the third quarter of 2014 when shares traded between lows of $42 and highs of $54, adjusted for stock splits. Tesla (TSLA) now trades near $822. Baron funds haven’t bought a single Tesla stock since 2016 but still made around 25 times their initial investment.

Tesla’s been a key driver for outperformance in the $745 million fund with a 33% weighting. If an investor placed $10,000 in the fund five years ago, they would have earned $43,900 today and $67,900 over 10 years with a portfolio of 20 stocks or fewer.

“The fund also has extremely low turnover [holding] companies in the portfolio [for] an average of eight and a half years,” said David Baron, the fund’s comanager and Ron’s son, in an interview with Insider. “And as a result, stocks that we’ve held between five and 10 years in the portfolio  have had an average annual return of 37%.”

The fund’s focus is on investing in high quality businesses that continue to invest in themselves regardless of the market environment, so they can benefit from earnings growth.

The current environment for growth stocks looks challenged with yields rising and inflation surging. Growth stocks with high valuations could be impacted by higher interest rates as investors will expect to pay less for lower future cash flows.

Baron doesn’t spend too much time worrying about valuation. His approach is to grow the flowers and cut the weeds. This means selling companies, regardless of price, when they no longer meet expectations.

“Don’t worry about valuation just because they’ve gotten a little high, just keep them,” Baron said. “You don’t have to buy more of it, but you don’t have to sell it.”

Despite having to cut back some of their investment in Tesla because the position had gotten so large in the portfolio, Baron continues to hold the majority stake without necessarily needing to buy more.

This is in contrast to other Tesla bulls such as Chamath Palihapitiya and Cathie Wood, who have cut positions recently.

Baron’s thesis is that Tesla can continue to grow its vehicles at a 50% compound annual rate over the coming years.

“Even if they just get to 10 million vehicles over the next five or six years at a $10,000 gross profit margin, which is what they tend to generate,” Baron said, “that’s $100 billion of profit right there, which is a 10 times multiple, it’s a trillion dollars  of value right there from 800 today.”

This also doesn’t include additional revenue streams, such as the battery business, which Baron thinks could drive the stock further. Even with increased competition, he views Tesla as miles ahead as its achieved success with little marketing.

One of the biggest risks is that the company becomes too reliant on CEO Elon Musk. Baron feels confident there’s a deep bench of executives at Tesla who could step in if something were to happen, but recognizes the stock may take a hit.

“We still see a triple on that stock over the next 10 years,” Baron said.

He also sees the potential for significant upside across a number of stocks in his fund and highlights the following picks.

Costar (CSGP)

Graph of CSGP stock from investing.com

Graph of CSGP stock from investing.com
Markets Insider

Costar is an online information provider to the commercial real estate industry. Baron has not purchased a single share since 2015 and has made five and half times the initial investment. He stills sees the stock doubling over the next five years.

“We believe they have a huge market opportunity as they add new services, make tuck-in acquisitions and further increase their bookings,” Baron said.

Hyatt Hotels (H) & Red Rock Resorts (RRR)

Hyatt stock on October 15

Hyatt stock on October 15
Markets Insider

It might be surprising to see a growth fund investing in travel and leisure, a sector typically associated with value investing. But Baron says these are growth companies selling at value prices with significant upside in the years to come.

“These companies have all found better, more efficient ways to operate their businesses, which we believe in increased earnings well beyond pre-pandemic levels, allowing these companies to emerge from the pandemic in a financially stronger position,” Baron said.

Penn National Gaming (PENN)

PENN stock on October 15

PENN stock on October 15
Markets Insider

Penn National Gaming is a gambling company that benefits from both individuals staying at home and those seeking experiences through its digital and casino businesses. Baron’s been invested in the stock since 2001.

“We’ve made a tonne of money in that one over the 20 years that we’ve owned it and we still see significant upside in the years to come,” Baron said.

The stock is currently trading around $75. Baron said the core business is worth around $50 today, which means the Barstool Sports opportunity is worth around $25. He thinks this is wrong and it should be worth around $80 over time, suggesting around 73% upside.

“They’re well diversified,” Baron said. “We like the core business and it generates a ton of free cash flow of about $800 million per year and they continue to reinvest back in the business, for the sports betting and iGaming growth opportunity where we see about a total investment there of about $3 billion.”