Large-cap growth: 4 favorite Fidelity funds

Companies with a proven ability to grow earnings should be attracting more interest, a fund specialist says.

By TheStockAdvisors Oct 9, 2011 12:49PM
By Jack Bowers, Fidelity Monitor

It’s been 11.5 years since growth stock values topped out in a speculative frenzy. Most of today’s large-cap growth stocks are now at the opposite end of the valuation spectrum. Investor pessimism, along with big earnings gains, has made them cheap.

Today it is easy to find good growth stocks with P/E ratios at a fraction of their projected earnings growth rate. Some of them even sell at below-market multiples.

That might make sense if revenue growth were vanishing everywhere, but that’s not the case. Many large-cap growth stocks are expected to rack up robust five-year sales growth, even as other firms continue to focus mainly on cost-cutting activity to boost earnings.

Companies with a proven ability to grow earnings should be attracting more interest, especially in today’s environment.

Many investors are so preoccupied with managing risk that the differences between stocks or stock groups are not even being considered. In effect, the market is throwing out the baby with the bath water.

That attitude can’t last. Fear and emotions can rule the market in the short run, but in the long run the only thing that matters is earnings.

And that’s why we think today’s large-cap growth stocks represent an attractive long-term opportunity. Here's as some of our favorites, listed them in increasing order of risk:

Fidelity Contrafund (FCNTX) is unique for two reasons. First, legendary manager Will Danoff has been at the helm for 21 years, and is ahead of 97% of his peers over the last decade (6/30 Lipper data).

Second, the fund’s volatility has been running 12% below that of the S&P 500. Contrafund is overweighted in technology (30% of assets) and consumer discretionary (18%), but is underweighted in most other places.

Its foreign position has declined to 18% of holdings. Danoff’s cash and gold position – presently about 10% of holdings – has helped performance this year, and is one of the reasons for the fund’s low risk score (0.88).

But it could become a drag going forward. All things considered, this fund is a great long-term choice for those who want to minimize volatility without giving much up.

At Fidelity Focused Stock (FTQGX), Stephen DuFour runs a concentrated portfolio with only 47 stocks in total, and his top 10 holdings account for 39% of assets.

Yet surprisingly, he manages to keep volatility low, thanks to quantitative techniques and a diversified mix of industry groups.

The fund’s small size makes it possible to move quickly when opportunities arise, and the turnover data (292% as of 4/11) implies that DuFour is taking full advantage of that ability.

Having run the fund for 5.5 years, he has beaten about 90% of his peers for the five years ending 6/30 (Lipper data).

This year’s performance has been helped by an overweighted position in health care along with an underweighted position in financial services.

We think Focused Stock is a great choice for aggressive investors, but keep in mind the good times may not last if the fund becomes too popular.

Sonu Kalra has only managed Fidelity Blue Chip Growth (FBGRX) since July 2009, but we like what we see so far. Top industry groups are technology (33% of assets), consumer discretionary (18%) and health care (11%).

Overall risk is about 10% greater than the S&P 500. The fund’s foreign weighting is 11%. We like the fund’s mainstream approach to growth.

It’s broad enough that Fidelity’s advantage in research can really shine, but not so much that performance is diluted by slow growing companies. An excellent choice for long-term investors.

Jason Weiner will log 5 years at Fidelity Growth Discovery (FDSVX) as of next February, and has already pushed the fund ahead of 88% of its peers on a 5-year basis (Lipper, 6/30 data).

This year Weiner has moved the fund into a more aggressive stance and the fund is holding up well this year.

Unlike some peers with large stakes in health care and consumer staples, this fund has only 11% in those defensive groups. Instead, Weiner has placed an outsized bet on industrial stocks (18%).

This positioning makes the fund a solid choice for the growing competitiveness of U.S. exporters. Overall risk is about 10% greater than the S&P 500.

TheStockAdvisors.com​​ is a free website that highlights stock recommendations and market commentary from leading financial newsletter advisers.
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