Mispriced founder-involved companies positioned to rebound

On the heels of a rough 2022 for stocks and other risk assets, Fidelity Portfolio Manager Dan Kelley says he is sharpening his focus on founder-involved companies with astute leaders who are exercising capital discipline, cutting costs, raising prices, and finding innovative ways to drive revenue.

Noting the fragile investment backdrop—economic uncertainty, high borrowing costs, and slower demand—Kelley says he is especially interested in such founder-involved companies that have also seen their price-earnings valuations drop significantly, thus leaving them appealingly mispriced relative to their outlook for revenue and earnings.

“I believe founder-involved companies that have used the recent downturn to strengthen their business have the highest likelihood of becoming more profitable,” says Kelley, who has managed Fidelity^® Founders Fund (FIFNX) since its debut in 2019. The fund is a diversified domestic equity strategy that targets companies driven by the entrepreneurial spirit and inherent vested interest of their founders/leaders.

One investment that fits Kelley’s criteria is video-streaming service provider Netflix (NFLX), led by co-founder and Co-CEO Reed Hastings. Facing declining subscriber growth and heightened competition, the company launched a lower-priced, ad-based subscription to reach cost-conscious consumers, while focusing its spending on new content. It is also close to introducing a plan to rein in password sharing that some analysts estimate could generate an additional $721 million in revenue this year in the U.S. and Canada, according to Kelley.

In the second half of 2022, the portfolio manager considerably increased the fund’s exposure to Netflix, which ended January as the fund’s No. 6 holding and an overweight versus the benchmark Russell 3000^® Index.

Kelley also likes what Uber Technologies (UBER) did after pandemic-related restrictions kept customers and drivers at home, curtailing revenue. Under new leadership that remained committed to the co-founders’ vision for a mobility platform, the ride-hailing firm cut costs, introduced real-time pricing for its mobility business, and grew its Uber Eats food-delivery service to diversify its revenue base, says Kelley. Uber became an outsized fund holding after he added to it in 2022.

Elsewhere, post-pandemic demand for many consumer-related products that rely on semiconductors—including appliances and gaming devices—sparked fears of excess capacity for many “chip” companies, creating what Kelley views as an opportunity.

Kelley says shares of semiconductor company Analog Devices (ADI) declined along with peers last year, but he is encouraged by the firm’s broad diversification across end markets and the likelihood it has seen the worst of a slowdown in demand. Co-founder Ray Stata is a board member and large shareholder of the Massachusetts-based company, another notable position in the portfolio, as of January 31.

For specific fund information, including full holdings, please click on the fund trading symbol above.