Investor Confidant: Baron Funds CEO identifies six sectors primed for growth

It's always worthwhile to get insights from seasoned money managers. In particular, it's good to know which sectors they are buying in a difficult market. And we're in a difficult market right now, when many observers expect a correction.

Ron Baron is CEO and chief investment officer of the Baron Funds, a family of mutual funds that invests in small, mid-sized, and large-growth companies. Last week, at a panel discussion on active trading stragegies in New York, I asked Baron what he would invest in today, given the market uncertainty.
Baron had a lot of ideas about which industries would offer the greatest opportunities now, and over the next three to five years. He did not make specific stock picks, but he offered solid reasons for exploring companies in specific sectors. And he emphasized selecting companies that could adjust to changes in technology and capitalize on trends.

"There are opportunities everywhere," said an enthusiastic Baron. "You just have to make sure that you are not investing in companies that are going to be [eliminated]." He cited General Motors, newspaper companies, and bookstores as types of companies that have not adjusted well to economic challenges and would likely be losing propositions going forward.

As for industries he bets will flourish, Baron likes education -- with only about 30 percent of the adult American population holding college degrees, there's plenty of room for growth, he argues: "If you want to get a good job, keep a good job, and provide for your family, you have to be educated, so that's a good opportunity."

Baron also envisions growth in health care. Because the U.S. spends 17 percent of its GDP on health care but doesn't provide better care than many countries that spend a lot less, he said, many companies in that industry could benefit from technological and administrative cost-savings. Baron noted that the industry is resistant to adopting more cost-efficient technologies, but he feels that companies that develop newer, more effective measures would eventually prevail.

"There are tremendous opportunities to provide quality care for less money than we are now," Baron said.

Infrastructure plays provide another opportunity, said Baron. U.S. spending on infrastructure lags behind spending in Europe and Asia, he said, so if you add in President Obama's stimulus kicking in next year, companies that support infrastructure-building provide opportunities for growth.

Baron also sees an opportunity for growth among companies that sell private-label goods. Grocery-store chains and large retailers create their own branded products, which typically sell for less than well-known brands, but provide the company with stellar profit margins. Private labels, Baron says, are flourishing in Europe, and more cost-conscious Americans will speed their growth in the U.S.

Cost considerations will also encourage Americans to keep their cars longer, so Baron said companies that support long-term auto maintenance should also see growth over the next few years. And he closed by noting that even with all the problems the financial services industry has faced over the last year, there were opportunities for growth among companies who currently had healthy balance sheets and were willing to steer clear of risky securities.

While he didn't offer specific stock picks for each category, Baron did mention two companies he thought were doing things right. In the area of financial services, he said the conference sponsor Charles Schwab (SCHW) would do well because the company has a great balance sheet now that investors have deposited their money with an investment firm they believe will not invest in risky securities like Merrill Lynch and Lehman Bros. He also suggested that MSCI (MXB), which specializes in international indexes, has room for growth especially since overseas investing is likely to increase because of the world's more global economy.

The six sectors Baron recommended cover a wide range of categories that have proven fairly recession-resistant. With some solid research, investors should be able to turn up a few winners, whether the markets have a major correction or not.

Matthew Scott is DailyFinance's investment reporter and editor. His column Investor Confidant will appear periodically.
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