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Bares Capital Management is an Austin, TX based investment management firm founded by Brian Bares in 2000. Bares specializes in managing concentrated portfolios of small company common stocks for institutional investors. The company combines qualitative and quantitative research to pick stocks. It limits its portfolio to a handful of business, which improves the company’s depth of knowledge of each company and focuses clients’ capital in the best investments.

Bares slightly reduced his portfolio from $379 million at the end of June to $358 million at the end of September. The number of positions in the portfolio was also slightly lower. Bares had had 73 positions at the end of the second quarter and now has 71 positions. He sold out Leucadia National Corp (LUK), SPDR Index Shares Funds (GAF) and Kinder Morgan Management (KMR). LUK returned 5.69% since the end of September, underperforming SPY by about 6%. GAF, which was a new position opened in the second quarter, returned 8.80% since the end of third quarter, also underperforming the market. Kinder Morgan Management, which was also a new position in Bares’ portfolio in the second quarter, lost 10.52% over the third quarter.

Bares increased his position in the Dolan Company (DM). Bares reported to hold $23.6 million worth of DM at the end of the third quarter, up 17% from the end of June. However, DM lost 3.11% so far since the end of September. In addition to DM, Bares also increased his stake in Stamps.com (STMP), Utah Medical Products (UTMD), Interval Leisure Group (IILG), and The Middleby Corp (MIDD). These four stocks generated a weighted average return of 22.96%, beating SPY by 11 percentage points.

Bares also significantly increased his position in Stratasys Inc (SSYS) by 1982% to $7.4 million. Bares made a bundle from this position, as the stock gained 62.89% since the end of September. Statasys is a manufacturer of 3D printers and repaid prototyping systems. The company reported net income of $5.86 million, up from $3.18 million a year ago. Chuck Royce also had $7.1 million invested in SSYS. Israel Englander had $1.3 million invested in the stock as well.

During the third quarter, Bares also bought new stakes in Asure Software (ASUR). Bares bought $286,000 worth of the stock with $11.72 million market cap over the third quarter. ASUR returned 13.15% since the end of September, outperforming the market.

We like Bares. He shared his micro-cap stock picking strategy with investors by publishing a book titled: The Small Cap Advantage: How Top Endowments and Foundations Turn Small Stocks into Big Returns. His Bares Capital had a gross return of 53% in 2010. We recommend investors to focus on Bares’ best stock picks and we believe that by doing so, investors are more likely to beat the market in the long term.

Disclosure: I am long SPY.

Source: Bares Capital's Top Small Cap Stock Picks