Three summers ago, Mike Lippert was cycling with his wife near Lake Tahoe when, inexplicably, he crashed and suffered a spinal-cord injury. He spent a week in a medically induced coma and several weeks in the hospital before being transported home to New York for rehabilitation.
When Lippert, 51, walked onto the stage at Lincoln Center that November for the annual Baron Investment Conference, he was overwhelmed with emotion. “There are so many lessons you learn when you go through a thing like this,” says the manager of the $430 million Baron Opportunity fund (BIOPX).
Among other things, it drove home the importance of staying focused on what he can control, and not getting frustrated with what he can’t—a critical skill for any investor. The experience also affirmed just how much Lippert loves his work: “I’m intellectually challenged every day, and I get to meet people who are doing unbelievably cool things,” he says.
First launched in 2000, the Opportunity fund (BIOPX) invests in innovation through companies instigating change or benefiting from it. Lippert, who has managed the fund since early 2006, has posted an 12.1% average annual return over the past decade, better than 87% of all mid-cap growth funds.
Like most managers at Baron Capital, Lippert aims to find growth companies with sustainable competitive advantages, and the potential to double in value over a four- or five-year period. Yet, he focuses exclusively on companies influenced by what he calls sustainable secular trends, or major changes in the way people work and live.
A history major turned corporate attorney, Lipper worked in intellectual-property litigation for about a decade, eventually making partner at a law firm. Then he decided it was time for a career change. Following a brief stint at a hedge fund, he landed an analyst position at Baron Capital in 2001.
His investing style, it turns out, isn’t entirely different from the work he did as a litigator. “One of the partners at my law firm used to say, ‘No wishes, hopes, and dreams…go find the evidence and prove it,’” recalls Lippert, who supplements his own research with that of Baron’s more than two dozen analysts. They typically validate information from company management with additional research involving customers, suppliers, competitors, and industry experts.
Lippert tracks and compares holding details in a spreadsheet he created to help him pinpoint ideal position sizes, and spot unforeseen risks.
The fund, which can invest in companies of any size, owns its share of megacaps, including top holdings Amazon.com (AMZN), Microsoft (MSFT), and Alphabet (GOOGL). But lesser-known companies also drive overall returns.
Top-five holding Guidewire Software (GWRE), which has a tiny weighting in Baron Opportunity’s Russell 3000 Growth benchmark, is a significant contributor to fund performance. Lippert, who is a fan of Software-as-a-Service business models—they enjoy steadily recurring revenue and sticky customer relationships—calls Guidewire a “poster child for the kind of companies we’re looking for.”
The fund bought Guidewire shortly after its 2012 initial public offering. The company has the dominant market share in software used by property and casualty companies to run their core businesses and manage customer relationships. Guidewire has lost only one customer it its history, he says, “and they came back.”
Lippert has come back, too, buying more Guidewire stock since the IPO. “We believe this is going to be a 20% grower for a very long time,” he says.
Gartner (IT), a technology research and consulting firm, is another top holding in the fund, with an outsize weighting relative to the benchmark. While Gartner is best known for its information-technology research, the company has also acquired expertise in major business functions, from customer service to supply-chain management. Its subscription model translates into a “high-margin, cash-flow-generative business that is benefiting from all the changes going on in technology,” says Lippert, who first bought the stock in 2007.
The manager scooped up shares of Tesla (TSLA) six years ago, at about $30 apiece. He later sold at about $100, but soon regretted the decision and got back in around $200, and is holding on. The electric-car maker’s stock was trading around $315 last week. Regardless of whether Tesla stays public or goes private, it is reaching an inflection point in terms of vehicle sales and gross profit margins, Lippert says. “Tesla will start to generate a small amount of cash flow later next year,” he adds, noting that the company is on track to generate 10% operating margins by 2022.
Lippert isn’t the only Baron Capital manager who believes in Tesla’s long-term prospects. Funds the firm manages have significant ownership of the stock, according to Morningstar.
Most investors associate health-care innovation with drug discovery, but robotics and advanced optical systems are transforming the operating room. With that secular shift in mind, Lippert added Intuitive Surgical (ISRG) to the fund in 2016, when the maker of the da Vinci Surgical System traded at a little over $200 a share. The stock fetched about $540 last week.
Hospitals and surgery centers pay about $2 million for the system, which uses robotic arms to assist surgeons in less-invasive procedures. “It’s a great razor and razor-blade business,” says Lippert, noting that more than 70% of revenue is recurring, largely from replacement of disposable instruments used for each patient. The company is steadily adding to the list of procedures that can be performed with the robot, and expanding its geographic reach. As the number of surgeries grows—it’s up 18% this year—so does revenue.
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