Does Montrose Environmental Group (MEG) Have a Compelling Valuation?
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Baron Funds, an investment management company, released its “Baron Discovery Fund” third quarter 2024 investor letter. A copy of the letter can be downloaded here. In the third quarter, the fund appreciated 13.55% (Institutional Shares), outperforming the 8.41% return for the Russell 2000 Growth Index. Year-to-date, the fund returned 9.50% compared to the index's 13.22% return. The firm was pleased with the fund's performance in the third quarter and believes that the bear market in small-cap growth stocks, which began in February 2021, may finally end. In addition, please check the fund’s top five holdings to know its best picks in 2024.
Baron Discovery Fund highlighted stocks like Montrose Environmental Group, Inc. (NYSE:MEG) in the third quarter 2024 investor letter. Montrose Environmental Group, Inc. (NYSE:MEG) is an environmental services company. The one-month return of Montrose Environmental Group, Inc. (NYSE:MEG) was 9.23%, and its shares lost 5.36% of their value over the last 52 weeks. On November 6, 2024, Montrose Environmental Group, Inc. (NYSE:MEG) stock closed at $24.39 per share with a market capitalization of $834.867 million.
Baron Discovery Fund stated the following regarding Montrose Environmental Group, Inc. (NYSE:MEG) in its Q3 2024 investor letter:
“Montrose Environmental Group, Inc. (NYSE:MEG), a leading environmental services company, underperformed in the quarter. The stock pulled back sharply after the Supreme Court decided the Loper Bright Enterprises v. Raimondo case in June 2024, which overturned the so-called “Chevron Deference Doctrine” named from the 1984 Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. case. Chevron held that federal courts should defer to the decisions of administrative agencies when they are interpreting a law or statute. Now future agency decision-making will come under more scrutiny and court challenge. Because Montrose derives most of its business from EPA related work, investors grew concerned that its growth could slow. We think this concern is overblown. Loper did not require a reassessment of regulations that are already in place (which is basically all of Montrose’s current business). In addition, Montrose’s business drivers are diverse and its testing and advisory business benefits from complexity. We added to our position on weakness. While the Loper case might affect the timing and magnitude of Montrose’s opportunity to clean up PFAS (so-called “forever plastics”) sites (since EPA regulations are currently being decided), we still believe this is a huge potential line of business for the company. We continue to believe that Montrose, as a vertically integrated environmental services company, has a unique value proposition to customers and we believe that the company will be successful in the execution of its strategy to grow organically and through acquisition. And valuation is compelling at a mid-single-digit multiple of cash flow for an industrial company with Montrose’s growth characteristics.”
