Capitalizing on corporate turnarounds led by fresh execs

As part of his preference for stocks that are mispriced relative to his estimate of earnings, Fidelity Portfolio Manager Matt Fruhan is focusing on the shares of three prominent companies – GE Aerospace, Exxon Mobil and Wells Fargo – led by CEOs who have been tasked with turning around their businesses.

“All three were formerly considered best in class but struggled amid some notable missteps, especially GE Aerospace [formerly General Electric] and Wells Fargo, each of which had a stretched balance sheet and faced substantial operational and management challenges,” says Fruhan, who helms Fidelity^® Large Cap Stock Fund (FLCSX).

In managing the diversified domestic equity strategy since 2005, Fruhan has followed his belief that securities can become mispriced relative to their true long-term value when investors overreact to changes in short-term earnings estimates.

He points out that his bottom-up investment strategy is based on fundamental analysis and not necessarily the tenure of a management team. “But my willingness to make these stocks top-five fund holdings is a strong indication of my investment approach, as well as the success management at these firms has had in reviving flagging operations,” he explains.

As of December 31, GE Aerospace (GE), Exxon Mobil (XOM) and Wells Fargo (WFC) represented roughly 16% of the fund’s assets. The three stocks were the fund’s largest overweight positions relative to its benchmark, the S&P 500^® index.

Exxon Mobil’s CEO Darren Woods became CEO of the integrated oil and gas firm in 2017. Larry Culp, who once headed the former industrial conglomerate General Electric, was named CEO of GE Aerospace in 2022 and became chairman and CEO of GE Aerospace when it launched as a public company in April 2024. Wells Fargo chief executive Charlie Scharf joined the banking firm in 2019.

Fruhan considers Exxon to be the best-positioned company in the energy business and believes its production growth outlook with high returns and free cash flow could help it lead the sector through cycles. “Among other attributes, the firm’s balance sheet is strong, and it has in Guyana what I think is the industry’s best growth asset,” he contends.

Fruhan sees GE Aerospace as a pure-play aerospace business, and he notes that investors have responded favorably to this increased clarity and have started to recognize both the durability and growth of the firm’s earnings and cash flow.

Regarding Wells Fargo, Fruhan sees big opportunities from overcoming self-inflicted governance and internal-control issues that led to Scharf’s arrival in 2019. This setback, he explains, led to a Fed-imposed regulatory asset cap, which the central bank says will remain until Wells Fargo demonstrates improved management and compliance. “Management has taken significant steps in that direction, and if the asset cap ultimately is lifted, as I expect, I believe Wells Fargo has a lot of upside potential,” he says.

Fruhan notes that each of the three companies operates in a cyclical industry, but that their strategies and improving financial strength may enable them to gain market share in periods where the industry struggles and help increase their long-term earnings power.

“In essence, I believe their ‘self-help’ opportunities through cost-cutting and operational improvement are likely to generate less-volatile earnings and cash flow as these companies progress in their business turnarounds,” Fruhan concludes.

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