"There's no silver bullet for outpacing a downtrending market, but I do think investments we've identified as defensive-growth stocks could outperform in 2020," says Asher Anolic, portfolio co-manager of Fidelity® Growth Discovery Fund (FDSVX).
Anolic says defensive growth is a major part of his investment process, explaining that he and Fidelity's quantitative research team define "defensive growth" as stocks of companies with historically strong earnings and sales increases, lower-than-average price volatility, and strong measures of quality—regardless of sector.
Quality, the quant team says, is measured partly by free-cash-flow margin, historical earnings variability (the lower the better), and return on invested capital.
While defensive-growth stocks have tended to lag the market early in an economic cycle, quant team analyst Michael Robertson's published research suggests that stocks rated "buy" by Fidelity's fundamental analysts that also fit the quant team's "defensive-growth" criteria had outperformed notably, on average, late in an economic cycle.
One notable "defensive-growth" position in the fund as of March 31, Anolic says, was American Tower (AMT). This company owns and leases real estate to companies that erect cell-phone towers. He thinks the firm faces limited competition and is both an "offensive and defensive" investment.
American Tower is defensive based on its recurring revenue, he says, but offensive because of its role in building out 5G networks, which he considers a megatrend. Anolic notes the stock has been a longtime fund holding.
"I remain on the lookout for growth stocks with defensive qualities, especially names I think are offering good value based on my earnings estimates several years out," he says.
Fidelity® Growth Discovery Fund held securities mentioned in this article on March 31, 2020. As of this date, American Tower composed 2.42% of fund assets.
Growth stocks can perform differently from the market as a whole and other types of stocks, and can be more volatile than other types of stocks.
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