Baron Discovery Fund: Latest Insights and Commentary

The Review and Outlook for period ending June 30, 2025, is not yet available.

CONTRIBUTORS

• Leading defense technology provider Kratos Defense & Security Solutions, Inc. contributed to performance during the quarter amid growing momentum across the business. We believe Kratos is well positioned for accelerated multi-year growth, as prior investments in high-growth areas of defense—such as hypersonics, drone engines and small missile engines, space, microwave electronics, and unmanned systems—are translating into larger contract awards. Demand is being driven by increased funding from the Department of Defense and other global militaries. In our view, the current operating environment has never been better, and few companies are as well equipped as Kratos to deliver the advanced solutions required for modern warfare.
• Shares of Montrose Environmental Group, Inc., a leading environmental services company, rebounded during the quarter. The stock had fallen sharply earlier in the year due to concerns that environmental policy changes and new leadership at the Environmental Protection Agency under President Trump would reduce enforcement of regulations underpinning Montrose’s testing and monitoring services. These concerns ultimately did not materialize, and the company continues to grow, supported by strong secular tailwinds such as rising industrial activity and increased regulatory oversight at the state level. Montrose’s decision to pause acquisition spending has also allowed its organic growth profile to stand out, while the payoff of its convertible debt has increased transparency, helping unlock value for shareholders. We remain invested in Montrose, as we believe the company retains its competitive advantage, stands to benefit from secular growth trends, and trades at an attractive valuation.
• Shares of Karman Holdings Inc., a best-in-class supplier of defense systems, rose during the quarter after the company reported strong earnings results that exceeded investor expectations. The company is well positioned across nearly all of the fastest-growing areas within the upcoming $1 trillion-plus U.S. defense budget and is likely to play a pivotal role in supporting U.S. involvement in an expanding number of global conflicts. We believe Karman’s position as the go-to outsourced solutions provider for the largest and most dominant defense companies should enable it to outpace overall defense budget growth and continue to earn exceptional margins.

 

DETRACTORS

• Clearwater Analytics Holdings, Inc. provides portfolio accounting and reporting software. While the company reported strong quarterly earnings and its business fundamentals remain solid, shares fell as investors sought evidence that management can successfully integrate its three recent acquisitions without disrupting the core business. Insider selling also weighed on sentiment, though that overhang now appears largely resolved. We retain conviction in the stock. We believe Clearwater has meaningful competitive advantages and the potential to compound revenue at a high-teens to 20% rate for several years. The company has an efficient business model that should drive 40%-plus adjusted EBITDA margins over time.
• Inspire Medical Systems, Inc. is a medical device company offering a treatment option called hypoglossal nerve stimulation for patients with moderate-to-severe obstructive sleep apnea. Shares declined during the second quarter. The company is in the early stages of commercializing its fifth-generation device, Inspire 5, which reduces procedure time and simplifies the process for surgeons. Management noted that some patients delayed surgery in anticipation of the new device, leading to a slowdown in procedures during the quarter. Shares were also pressured by concerns about new competitors entering the market and the potential long-term impact of GLP-1 weight loss drugs on business, given the link between obesity and sleep apnea. Despite these headwinds, we believe Inspire remains well positioned to grow at a healthy rate, supported by its market leadership and the substantial size of the addressable patient population. We believe the current valuation presents a compelling entry point given the company’s long-term growth potential.
• The Macerich Company is a REIT that owns and operates a high-quality portfolio of malls and shopping centers across the U.S. Shares declined during the quarter amid concerns that strong retail leasing demand could soften due to tariff-related pressures and broader macroeconomic uncertainty. While we remain optimistic about the company’s longer-term prospects and the potential for valuation multiple expansion under new CEO Jackson Hsieh, we chose to exit the position during the quarter given ongoing headwinds and the opportunity to reallocate capital to higher-conviction ideas.