Picks From Baron Partners Fund

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Baron Funds is known for their small-cap growth focus. However, firm founder Ron Baron has never advocated selling a company just because it has grown, leading to some of the Baron funds holding companies for many years and well beyond any accepted definition of small cap. One fund offering that is specifically meant to hold such companies is Baron Partners Fund (BPTRX).

This fund, run by Baron, started as a partnership that was eventually turned into a mutual fund. From day one it was a non-diversified offering, focusing on the fund family's “best” ideas. Management is pretty much completely unconstrained by anything. So, investors looking to find the Baron fund family's best growth picks, regardless of size, should start by consulting this fund's portfolio.

Although I generally favor value over growth, I'm a shareholder of this fund. Moreover, I make a habit of reviewing its holdings to see if there is some common ground between my desire for dividend paying investments and Baron's focus on growth. After a recent review, I found a few companies that I wanted to look at more closely: Factset (NYSE: FDS), Fastenal (NASDAQ: FAST), and Vail Resorts (NYSE: MTN).

Data, Data, Everywhere
Factset is one of the heavyweights in the financial data industry. The information it collects and distributes is massive and spans from company data to economic information. The majority of its revenue comes from so-called “buy side” customers, or those who use the information to inform their own investing decisions. Although the company provides everything an investor might need, it is not the only company to make that claim. Some of its competitors include Bloomberg and Thomson Reuters. This is a very competitive space.

Despite the cutthroat nature of its business, Factset has done fairly well historically. One important offering of its product is functionality (slicing and dicing data as needed) across multiple databases. Factset's products are so vital to its customers that its renewal rates are north of 90%. This has led to the company's enviable track record of dividend increases spanning over 10 years. Although the current yield is only around 1.4%, the growth rate of its dividend disbursement has, historically, been multiples of the historical rate of inflation. This is a dividend growth story that should interest investors seeking a fast growing distribution, particularly since Factset has no long term debt on its balance sheet.

Need a Part?
Founded in the late 1960s, Fastenal sells industrial and construction supplies to wholesale and retail customers domestically and internationally. At the end of 2011, the company had over 2,500 stores selling products from 11 different product lines. Although it has an international presence, North America makes up the vast majority of Fastenal's business. Management believes this market can support about 3,500 stores, but has not yet made any projections for its international growth potential, which is likely to be material based on a currently limited foreign presence. Part of the company's competitive advantage is the size and scope of its store base and distribution system in a highly fragmented market, something that it should be able to replicate internationally.

Although it's hard to describe the company's business of selling such things as nuts and bolts as “sexy,” it is pretty reliable. Its that steady flow of business that underpins Fastenal's impressive history of dividend increases, spanning more than 10 years. Moreover, the rate of its distribution growth is massive, though coming off of a low base (note, too, that last year's dividend increase was larger than it had been in recent years). Even if the dividend growth rate slows, it is likely to remain well ahead of inflation at a company that appears poised to grow its business for years to come. With a recent yield hovering around 2%, it might be a good time for dividend growth investors to step in.

Winter Wonderland
Vail Resorts has a relatively small yield based on its recently initiated dividend, but I couldn't resist looking at the company after the early season snow storm that blanketed my town in white. The company is the largest publicly traded owner of ski resorts. Vail's portfolio of resorts includes Vail, Beaver Creek, Breckenridge, and Keystone in Colorado, and Heavenly, Northstar, and Kirkwood in the Lake Tahoe area of California and Nevada. It's properties are destination resorts for skiers. Impressively, the company performed well last year despite the weak snowfall of the 2011-2012 winter season.

The company has a reasonable amount of long-term debt, though you should keep in mind that it owns material, long-lived assets (ski resorts). These assets create a fair amount of depreciation, so the company's earnings are not a true indication of its dividend paying ability. Cash flow, a more meaningful metric when depreciation charges are large (particularly true for real estate related businesses), amply covers the dividend. This isn't a great option for investors seeking a high yield, but for snow lovers it might be an interesting “trophy stock,” particularly if you like to put up framed shareholder certificates.

 


ReubenGBrewer has a position in Baron Partners Fund, but has no positions in any of the stocks mentioned. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend FactSet Research Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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