An investing lesson from COVID-19

Learn how one Fidelity small cap pro was buying when others were selling.

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Some of the best buying opportunities come during periods when most investors are rushing for the exits. That’s when disciplined investors like Fidelity’s small cap manager Kip Johann-Berkel can scoop up quality stocks at bargain prices.

"When stocks sold off in March, I invested in several businesses with significant economic exposure to the COVID-19 pandemic that I think reached very low levels due to indiscriminate selling," says Johann-Berkel, portfolio manager of Fidelity® Small Cap Stock Fund (FSLCX)

For example, shares of US Foods Holding (USFD), one of the largest food distributors to restaurants in the US, fell below $10 in mid-March, from as high as $40 in February. Fears grew that the company's business would suffer longer term, due to the forced closure of restaurants.

In March, management drew on a $1 billion credit facility and announced both a hiring freeze and furloughs to help deal with a rapid decline of sales to restaurants and the hospitality industry, Johann-Berkel says. The company also withdrew its financial guidance for the year.

Johann-Berkel considered this irrational fear: He believed the company had a balance sheet to help it survive an extended lockdown period. Moreover, he thought the stock could gain significantly over time, based on his estimate of its true value.

He notes US Foods shares more than doubled off their March lows through the end of June.

Similarly, Johann-Berkel invested in Lightspeed POS (LGHEF), a provider of point-of-sale software to retailers and restaurants, which it delivers as a service over the internet. While many investors foresaw a near-term revenue decline, Johann-Berkel saw strong recurring revenue in a normal environment, as well as a stock trading for one-third of his measurement of potential value in a recovered economy. Shares rallied strongly in the second quarter off their early-spring lows.

"Not every stock pick works out, but I remain energized about working to outperform the fund's benchmark over time because of my stock choices," Johann-Berkel says. "And I'm always on the lookout when the market disconnects from my view of value."

Fidelity® Small Cap Stock Fund held securities mentioned in this article as of its most recent holdings disclosure.

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