The stock prices of many companies that face competitive pressure from emerging technology or innovative alternatives reflect that the business may soon be obsolete, according to Fidelity’s Neil Nabar, signaling what he considers compelling opportunity.
“We’re finding hidden value in companies that have fallen from favor with investors who think demand is going to disappear,” explains Nabar, lead manager of Fidelity® Mid Cap Value Fund (FSMVX). “The stocks are priced as if the business is going away, but I think they’ll be around for some time.”
In managing the fund, Nabar seeks long-term growth of capital in a valuation-conscious manner with a bias toward the stocks of higher-quality companies. Central to his investment philosophy is the belief that buying strong franchises trading at what he believes is a discount to the intrinsic (fair) value of the business can add value for the fund.
Nabar says one example of a mispriced opportunity is in automotive-related stocks exposed to internal-combustion-engine vehicles, which many people think will exit the roadways due to the growing popularity of electric and hybrid alternatives.
“We believe the majority of cars on the road will be gas powered for a very long time to come, which means they’ll continue to need servicing and refueling,” says Nabar, adding that Fidelity research indicates that more U.S. consumers have been keeping their existing vehicles for longer than ever before.
He cites several holdings as of April 30 that are plays on this theme, including auto-parts retailer O’Reilly Automotive (ORLY) and Vontier (VNT), a maker of pump and payment systems for gas stations. “We thought the price-earnings multiple of each of these companies was too low, given the resilience of their cash flow,” he contends.
Nabar also sees value in certain oil-related companies, even though many investors think they will be displaced by clean energy providers. “I believe dependence on oil could last much longer than the market generally expects, with peak demand for oil likely at least 10 years away,” he says.
This thesis led to outsized stakes in refining firm Valero Energy (VLO) and exploration & production company Occidental Petroleum (OXY), each of which was purchased at a favorable valuation, Nabar says.
“Valero is a low-cost refiner and highly shareholder-friendly,” he says. “Occidental, which took on a lot of debt when it bought Anadarko Petroleum in 2019, has a fairly new board, with a focus on intelligent capital allocation and capital return to shareholders.”
Another opportunity Nabar sees is in the perception that the use of cash is going out of existence, given that many people today rarely use physical currency, preferring to pay with credit cards, checks, online, or digitally. “The obvious conclusion is that cash is becoming obsolete,” says Nabar. “The reality, though, is that the value of currency in circulation hit a record high early this year, according to the U.S. Federal Reserve.”
Given this trend, Nabar says he found value in the stock of security company Brinks (BCO), which operates armored trucks that pick up and drop off cash for retailers.
For specific fund information, including full holdings, please click on the fund trading symbol above.
Neil Nabar is a research analyst and portfolio manager in the Equity division at Fidelity Investments.
In this role, Mr. Nabar co-manages Fidelity and Fidelity Advisor Mid Cap Value Funds and Fidelity Mid Cap Value K6 Fund. Additionally, he is responsible for covering Real Estate Investment Trusts (REITs) across a variety of property types.
Prior to assuming his current position, Mr. Nabar managed Fidelity Select Construction and Housing Portfolio. In addition, he worked as a quantitative analyst from 2009 to 2012 and as an intern in 2008. Prior to joining Fidelity, he worked as an investment associate at Putnam Investments from 2004 to 2007. He has been in the financial industry since 2004.
Mr. Nabar earned his bachelor of arts degree in economics from Harvard University and his master of business administration from Columbia Business School. He is also a CFA® charterholder.