Fidelity Portfolio Manager: Buy Stocks the When the Market is Mispricing the Absolute Rate of Growth and Its Sustainability

Wall Street Transcript

67 WALL STREET, New York - July 25, 2014 - The Wall Street Transcript has just published its Investing Strategies Report. This special feature contains expert industry commentary through in-depth interviews with highly experienced, professional Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: MLP Investing - Bottom-Up Stock Selection - Long-Term Investing - Investing in ETFs - Blue-Chip Growth Investing - Cleantech Megatrend - Canadian Small-Cap Companies - Value and Low-Volatility Investing

Companies include: Apple Inc. (AAPL), Google Inc. (GOOG), QUALCOMM Inc. (QCOM), Green Mountain Coffee Roasters (GMCR), Starbucks Corp. (SBUX), The Coca-Cola Company (KO), Time Warner Cable Inc. (TWC), Nike Inc. (NKE), Mastercard Incorporated (MA), American Express Company (AXP) and many others.

In the following excerpt from the Investing Strategies Report, an experienced portfolio manager discusses his methodology and current top picks:

TWST: Could you please begin with an overview of the fund and how it has evolved since you've been at the helm?

Mr. Kalra: The Fidelity Blue Chip Growth Fund, it's a $16 billion large-cap growth fund focused on large-cap companies with above-average earnings growth potential. I focus on sustainable business models, while leaving room for fast growers that could become the blue chips of tomorrow. I'm a firm believer that stocks follow earnings, and what I've tried to do is take that one step further and focus on stocks that can grow earnings double digits sustainably over long periods of time. We did an internal study which showed that a portfolio of companies that grew their earnings 10% each year generates, on average, 1,300 bps of alpha annually versus a portfolio that doesn't grow their earnings 10% annually.

From a strategy perspective, the way I try to find these companies is to identify companies and industries with barriers to entry that can lead to a competitive advantage and pricing power. I also focus on the management team to make sure their incentives are aligned with shareholders, and this should lead to superior returns over the long term.

I characterize blue chip companies as companies that have sustainable business models with high returns on capital, and more importantly I focus on improving returns on capital as many times that dictates the direction of the p/e multiple and the stock price. I would summarize it as "investing in companies where the market is mispricing not only the absolute rate of growth, but also the sustainability or durability of the growth." I work closely with our global research team to identify these companies, and I still think of myself as an analyst at heart, and believe that bottom up, fundamental analysis is the best way to identify inappropriate valuations in the market.

I've been at the helm for five years now. The biggest change that I made was to increase the fund's growth profile. The market was coming out of a downturn when I took over the fund in the summer of 2009, and I felt that growth stocks were trading at significant discounts to their intrinsic value and long-term potential. Examples here would include Apple (AAPL) and Google (GOOG), two positions that I added to significantly to bring them into the top 10 of the portfolio.

Tactically, what I tried to do was broaden out the fund by increasing the number of holdings. At the same time I was also reducing the size of the sector weightings relative to the index. I consciously took bigger stakes in holdings where I and Fidelity's research team had more conviction. I added more names that I believed could sustain growth for a longer period of time. So the overall goal of these changes was to improve the risk/reward profile of the fund.

TWST: Where are your heaviest sector weightings currently? And what do you see as the secular themes that support growth in these sectors?

Mr. Kalra: The biggest weighting in the fund currently is in the technology sector...

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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