Baron Funds, an asset management firm, published its “Baron Small Cap Fund” second quarter 2021 investor letter – a copy of which can be downloaded here. A return of 6.37% was delivered by the fund’s institutional shares for the Q2 of 2021, trailing the S&P 500 Index, which appreciated 8.55% and modestly outperforming the Russell 2000 Growth Index which rose 3.92% for the same period. You can take a look at the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Baron Funds, the fund mentioned First Advantage Corporation (NASDAQ: FA) and discussed its stance on the firm. First Advantage Corporation is an Atlanta, Georgia,-based investigation services company with a $3.3 billion market capitalization. FA delivered a 17.78% return in the past month, and it closed at $22.69 per share on August 31, 2021.
Here is what Baron Funds has to say about First Advantage Corporation in its Q2 2021 investor letter:
“We participated in the First Advantage Corporation IPO during the quarter. First Advantage is a leading global provider of comprehensive background screening solutions that give employers and housing providers access to actionable information that results in faster, more accurate people decisions. The company offers a wide array of services including criminal background checks, drug screening, extended workforce screening, education verification, work verification, resident screening, driver compliance, and continuous monitoring.
The market for background screening is both large ($13 billion opportunity with $6 billion current market spending and $7 billion of potential white space) and growing (the market is estimated to grow at a 6% CAGR). Even as one of the industry leaders, First Advantage’s market share remains relatively low at approximately 9%. The industry is increasingly favoring scale, which should enable First Advantage to gain incremental market share moving forward. Relative to its smaller regional players (75% of the market), First Advantage has global reach, a vertically integrated sales force with sub-industry expertise targeting the fastest growing end markets, strong customer relationships (the top 100 customers have a 12-year average tenure), 65-plus HCM integrations, and deep technology and new product investment. First Advantage is well positioned to achieve consistent high single- to low double-digit organic revenue growth driven by a combination of underlying base growth, up and cross-selling, and new customer additions. The company has an attractive margin profile (high 20% increasing to low 30%’s adjusted EBITDA margins over time) and strong free cash flow generation. Acquisitions are expected to be the primary use of free cash flow and should be accretive, supplementing organic growth. We believe that First Advantage will be a steady earnings compounder, which should drive solid returns for the stock over a multi-year period.”
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Based on our calculations, First Advantage Corporation (NASDAQ: FA) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. FA was in 27 hedge fund portfolios at the end of the first half of 2021. First Advantage Corporation (NASDAQ: FA) delivered a -7.11% return in the past 5 days.
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.