- Since late 2016, the strong US stock rally has seen growth sectors like tech post strong performance.
- Megatrends like artificial intelligence, self-driving cars, biotechnology, and new drug discoveries are creating investment opportunities.
- Fidelity growth manager Steve Wymer looks for stocks where the market may underestimate the scale or durability of a company's growth potential.
Last year was a big year for growth stocks, with the Russell 3000® Growth Index up almost 30%. Some growth investors did even better, including Steve Wymer, manager of Fidelity Growth Company Fund (FDGRX).
Viewpoints caught up with Wymer, recently named Morningstar's Domestic Fund Manager of the Year*, to discuss his investment approach, the markets, and where he sees opportunities.
What is your outlook for stocks?
Wymer: I focus on bottom-up analysis for stock picking—and historically I haven't placed too much emphasis on top-down views. That said, the slowly improving US economy has been a staple of my outlook for the past several years.
In the US, growth expectations have improved this past year—albeit unevenly. I think this optimism stems from persistently low interest rates as well as reduced regulation and corporate taxation. I view the international backdrop as improving as well—most noticeably in Europe, where signs of a recovery have been popping up across the continent.
In the end, I think the key to success will be determining what specific sectors and companies may be able to deliver better results. I continue to seek firms growing revenue and earnings faster than the market average. My approach emphasizes strong industries or niches that can deliver durable long-term growth.
What do you think the impact of tax reform will be?
Wymer: Clearly a lot of companies are going to see more money fall to the bottom line, and I think we will see many companies investing more, though exactly what they do with the money remains to be seen. I also think more foreign companies will consider investing in the United States, as the combination of lower tax rates and the weak dollar makes the US a more attractive place to invest.
What parts of the market seem most promising?
Wymer: The market's strong rally following the November 2016 general election has continued, as global earnings expectations improved during 2017—a sharp contrast to the weakness in recent years—and have accelerated recently, spurred by reactions to the long-term impacts of the corporate tax cuts. As a result, some of the traditionally higher-growth sectors, such as information technology (+43% in 2017) and consumer discretionary (+23% in 2017), have rallied this year, even after impressive returns last year. Coming into the year, the fund still had a large overweighting in tech.
I've been bullish on the recent rise of machine learning—a type of artificial intelligence (AI) that provides computers with the ability to adapt and change without being explicitly programmed for a specific task.
As increasing amounts of personal, business, and other forms of information are collected, firms are using computers to harness this data, and are creating machine-learning predictive software for various purposes, including helping consumers make better buying decisions. Early beneficiaries include the large US and Chinese web-scale providers. Some examples here include the "recommended" videos that appear on YouTube and the voice-recognition technology used by Amazon.com’s Alexa and other electronic assistants. I should mention the fund has still held stakes in YouTube's (and Google's) parent company Alphabet (GOOG), as well as Amazon (AMZN).
These web firms have the sizable data sets, skilled data scientists, and corporate resources to apply to their underlying businesses. Use cases for data analytics should continue to broaden as more companies make use of AI and machine learning.
Cloud services firms that provide computers and software to corporations and start-ups—including Alphabet, Amazon, and Microsoft (MSFT)—are also using AI and machine learning. In particular, these companies and other enterprises employ the cloud to pilot and test AI technologies. In addition, as more and more data goes into the cloud, firms are turning to AI to help devise increasingly sophisticated ways to organize and view content.
Elsewhere, chipmakers also have been big beneficiaries of the AI/machine-learning trend.
Are there other technology trends that you are bullish on?
Wymer: I focus on finding companies with open-ended growth opportunities over the long term, which for me generally means the next 3 to 5 years. Within the technology sector, this often translates into owning firms in niches that offer faster growth, including differentiated semiconductor companies, internet leaders, new software firms, and video-game developers.
The fund's largest holding is a good example: Nvidia (NVDA). I liked the firm's diversified business, and I was optimistic about its prospects for long-term growth.
Known initially for its graphics processors, Nvidia is now considered by many as a go-to source of chips for AI, VR (virtual reality), and autonomous-driving applications, among others. Nvidia shares rallied in 2017, along with other tech companies, because it was expected to benefit from businesses' capital investments in cloud computing, factory automation, and other innovations. For example, Nvidia makes chips and software used by more than 100 companies developing autonomous vehicles and driving capabilities. I have pared my position in the stock following a run of strong performance, but as of December 31, 2017, the stock was still the largest holding in the fund.
What about health care?
Wymer: The health care sector has not kept up with information technology over the past year, but I think that new types of medicine, often coupled with new diagnostic techniques, have the potential to extend lives. Within biotech, I've tended toward specialists in the treatment of unmet medical needs or severe diseases. I also sought firms targeting opportunities where existing therapies had some shortcoming, as well as those with what I saw as a strong product pipeline. Both Alnylam (ALNY) and bluebird bio (BLUE) fit this description.
Are there growth stories you think are overlooked?
Wymer: Consumer stocks are not always thought of as growth companies, but there are a number of trends in the sector that are driving growth. Athletic footwear, e-commerce, new media, and luxury goods are growing worldwide.
Morningstar recognized your long performance track record. To what do you attribute this success?
Wymer: A company's stock price reflects the market's collective view of its future earnings power, but the collective view can be wrong. The market can underestimate the duration of a company's growth, particularly in cases where the resiliency and extensibility of the business model are underappreciated. At Fidelity, we have an outstanding research department that helps me uncover these names and monitor their success over time. I believe that bottom-up, fundamental research, a disciplined approach to portfolio construction, and adopting a longer-term time horizon are the best mechanisms with which to identify and exploit these inefficiencies.
Established in 1988, the Morningstar Fund Manager of the Year award recognizes portfolio managers who demonstrate excellent investment skill and the courage to differ from the consensus, to benefit investors. To qualify for the award, managers' funds must have posted impressive returns for the year, and the managers must have a record of delivering outstanding long-term risk-adjusted performance and of aligning their interests with shareholders'. Managers' funds must currently have a Morningstar Analyst Rating™ of Gold or Silver over the past 12 months.
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