Tesla CEO Elon Musk Goes To Trial Monday To Defend $2.6 Billion SolarCity Acquisition
July 10, 2021
April 17, 2021
Sometimes it feels like it’s just millennials and Robinhood traders who are making money off investing in electric carmaker Tesla. Think again. Meet billionaire money manager Ron Baron and his many retiree investors. Folks who maybe aren’t quite sure what TikTok is and struggle with Zoom meetings have made an average annual return of 38% over the past five years because they own Tesla full tilt through one of Baron’s mutual funds.
Even after trimming some Tesla holdings, Baron has a staggering 41% of one of his largest funds invested in the carmaker’s stock—which makes him just about the biggest Tesla bull on the planet. That massive bet also helped to nearly double Baron’s net worth since March 2020.
Among Baron’s 17 funds, two in particular are heavily weighted in Tesla. The $7.3 billion (assets) Baron Partners fund, which Ron Baron runs with his son Michael, returned nearly 150% last year. At the end of 2020, 47% of its assets were in Tesla. After scaling back its holdings in the carmaker, at the end of March the stock still accounted for a very significant 41% of assets. The Baron Focused Growth fund, which Baron manages with his son David, has $671 million in assets and returned 122% last year; it’s gone from having 39% of assets in Tesla at the end of 2020 to 32% as of March 31.
“Tesla has been the most impactful investment I’ve ever made,” Baron says.
At the end of 2020, Baron Funds was the 12th largest shareholder in Tesla, according to filings. Among the carmaker’s top 50 largest institutional shareholders, Baron Funds also had the highest percentage of its overall portfolio allocated to Tesla, with 12%. Other notable investors include Edinburgh, Scotland-based firm Baillie Gifford, with 11% of its portfolio in Tesla, and Cathie Wood’s ARK Invest, which has 8.3% of its portfolio in the electric car maker.
Baron says he started building his firm’s position in Tesla in 2014, four years after the company went public, and increased it by 2016, investing a total of $387 million at an average (split-adjusted) cost of just over $43 per share. He hasn’t added to the position since. His firm’s investment has generated billions of dollars in gains for clients as the stock has skyrocketed over recent years, to nearly $750 per share as of April 16.
Baron’s fortune has surged in tandem with his funds’ successful bet on Tesla. His net worth has grown to $4.5 billion, Forbes estimates, up from $2.3 billion in mid-March 2020, due largely to Tesla’s explosive 728% rise during the previous 12 months.
So far, 2021 has been less lucrative. While the market is off to a solid start—with stock indices hitting record levels amid optimism about reopening the economy—many investors remain wary due to ongoing concerns about the pandemic and rising fears of inflation. After rising more than sevenfold last year, Tesla shares have struggled in 2021, falling 8.5% in the first quarter ending March 31. During that same period, the Baron Partners and Baron Focused Growth funds returned -0.44% and 0.02%, respectively, well below the S&P 500’s gain of around 8%.
As usual, 78-year-old Baron remains his upbeat self, positive about the market’s prospects going forward. “My confidence is in the long term,” he tells Forbes, Zooming from his East Hampton estate last month. “I’m an optimistic person.”
A respected buy-and-hold investor, Baron founded his asset management firm, Baron Capital, in 1982, with just $10 million under management. He oversaw decades of strong performance, building a reputation for successfully betting on small growth companies in the 1990s and 2000s. Today, his Baron Funds group manages some $52 billion in assets. His funds are pricey: the annual expense ratio for Baron Partners is 2.22%, and 1.35% for Baron Focused Growth. So Ron Baron gets paid well for his stock picks.
While many investors try to predict what will happen with the economy, the president or interest rates, Baron doesn’t fret about such matters, sticking to his tried and true method. His firm focuses on high-growth companies with a competitive advantage over the long-term. “When we make an investment we aim to double our money every five years,” Baron explains.
None of Baron’s investments have fit the mold more than electric vehicle maker Tesla, run by billionaire CEO Elon Musk, whose net worth is nearly $180 billion, according to Forbes. “He’s perhaps the best engineer on the planet,” Baron says of Musk. “I expect he’ll be the world’s first trillionaire.”
Pre-pandemic, Baron hosted an annual gathering for investors and members of the media in Manhattan with a surprise musical performance—Faith Hill and Tim McGraw one year, Jon Bon Jovi another. Like many of Baron’s clients, the attendees were mostly retirees who’d been investors since the 1990s—folks you would not expect to be so bullish on an upstart electric carmaker with an outspoken, unpredictable CEO.
In early March, Baron announced that his firm had sold 1.9 million shares of Tesla over the six months ending in February 2021 at an average cost of $629.40 per share. He cited “risk mitigation” for clients, as the stock had become too large a percentage of some portfolios. Another reason for selling shares, Baron explains, was to reduce debt and pay off credit in the leveraged Baron Partners fund.
But Baron maintains his long-time bullish price target for Tesla, predicting shares will reach $2,000 apiece within ten years, more than double its recent price of $740 per share.
While Baron says that everyone still refers to him as the “Tesla man,” Musk’s privately-owned rocket company, SpaceX, is his next big obsession. “It could potentially become as large as Tesla,” Baron says, adding that he predicts a 30x to 50x return on investment in the next ten years. So far, Baron Funds has invested several hundred million dollars “and counting” into Musk’s rocket producer, which completed its latest round of funding in February at a reported $74 billion valuation. Baron is particularly excited about the company’s upcoming satellite broadband service, Starlink, which he thinks could bring in hundreds of billions of dollars in the future.
“I want to be known as the SpaceX guy in a few years,” he says.
Despite scaling back some of his funds’ holdings in Tesla, Baron is adamant that he remains bullish on the electric vehicle maker’s long-term prospects. Baron says he thinks Tesla stock is fairly priced at around $700 to $800 per share, but sees more upside ahead in 2022. “If autonomous driving is as successful as I believe it will be, and Tesla continues to open new plants and grow its sales, which I think it will, by the end of the year the stock should be doing better again,” he predicts.
Another of Baron’s largest holdings today is animal medicine company IDEXX Laboratories, shares of which jumped by almost 90% in 2020. The veteran investor loves IDEXX’s “huge margins,” arguing that the company’s economies of scale help it gobble up market share. (Idexx has a market capitalization of $45 billion, compared to rivals like VCA Antech, which has a market cap of just $5 billion). The company is able to leverage its national lab network into higher margins than small-scale labs can offer, Baron points out. Given that IDEXX is growing at a high single-digit rate and maintains a strong balance sheet, Baron forecasts that he will double his investment over the next five years.
Baron also likes commercial real estate data provider CoStar, which he started buying during the early 2000s for around $20 to $30 per share. Today, the stock trades at over $900 per share, having jumped nearly 50% last year despite the pandemic wreaking havoc on many commercial properties. Baron calls CoStar, which is growing its business at around 20% annually, the “Bloomberg of real estate” and sees further upside ahead. “We want companies in big, adjustable markets that can take large shares,” says his son, David. “CoStar is the perfect example of that.” The company has also been reinvesting its capital to make its business harder to replicate—CoStar has invested over $1 billion towards building its proprietary database over the years. Baron points out that this should only add to its competitive advantage. “Any potential competitor would have to spend years and potentially billions of dollars to replicate CoStar’s data offering,” writes Morningstar analyst Kevin Brown.
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