Baron Funds, an asset management firm, published its “Baron Discovery Fund” third quarter 2021 investor letter – a copy of which can be downloaded here. A decline of 5.02% was delivered by the fund’s institutional shares for the third quarter of 2021, which was 0.63% better than the Russell 2000 Growth Index (the “Benchmark”). You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.
Baron Discovery Fund, in its Q3 2021 investor letter, mentioned Qualys, Inc. (NASDAQ: QLYS) and discussed its stance on the firm. Qualys, Inc. is a Foster City, California-based IT security company with a $5.4 billion market capitalization. QLYS delivered a 14.83% return since the beginning of the year, while its 12-month returns are up by 56.94%. The stock closed at $139.94 per share on November 16, 2021.
Here is what Baron Funds has to say about Qualys, Inc. in its Q3 2021 investor letter:
“We added to our position in Qualys, Inc., a provider of cybersecurity software that protects endpoints by ensuring that all devices on a network are mapped out (asset view and inventory), that software configurations are up to date on those devices (vulnerability management (“VM”)) and that the settings on the devices are in compliance with corporate policies (policy compliance (“PC”)). The company generates significant free cash flow from its legacy VM and PC products, and it has been working on new products that extend its knowledge of the information within its customers’ networks. These products fit into the endpoint detection and response (“EDR”) category and can be very powerful tools, as they use artificial intelligence to detect improper network intrusions and then automate defensive responses to them. From our due diligence, we believe that the Qualys EDR system is starting to gain traction at its enterprise customers, which would help to re-accelerate the company’s top-line growth from the low teens percentage growth, back to the high teens or even over 20% growth. Our purchases were made at what we believe were favorable valuations. We also believe that Qualys would be an interesting takeover target for another cybersecurity company given its high margins, significant free cash flow, premium market positioning, and fully cloud-delivered service, which would make integration into another company fairly seamless.”
Based on our calculations, Qualys, Inc. (NASDAQ: QLYS) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. QLYS was in 20 hedge fund portfolios at the end of the first half of 2021, compared to 12 funds in the previous quarter. Qualys, Inc. (NASDAQ: QLYS) delivered a 29.27% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.