Bargains outside our borders

Why certain high-quality growth stocks outside the U.S. might offer upside with relatively less downside.

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It’s understandable that some investors feel hesitant about investing internationally, says Fidelity’s Sammy Simnegar, since it’s worked to the advantage of many investors to remain focused on U.S. stocks for much of the past decade.

“But if you’re just focused on the U.S. market, you’re missing out on many high-quality companies with exposure to trends that I think could accelerate the coming years,” notes Simnegar, portfolio manager of Fidelity® International Capital Appreciation Fund (FIVFX). “In many cases, we find compelling value for the growth that we think lies ahead.”

The fund seeks high-quality growth investments—primarily in non-U.S. markets—that Simnegar believes are exposed to long-term mega-trends, as well as possess the three B’s: brands, barriers to entry, and ‘best in class’ management. Investing in stocks with these characteristics, he asserts, has led him to durable businesses with pricing power, healthy recurring revenue, significant free-cash-flow generation and returns on capital, and a low degree of leverage.

“The key is understanding the company’s growth potential over multiple years, and our conviction in that trajectory,” Simnegar says.

To ensure he’s not paying too much, Simnegar looks at every stock’s ratio of price to free cash flow, which provides a sense for a business’ ability to fund growth without taking on debt. He also believes it’s a measurement that is free of earnings-related accounting complexities.

Moreover, to take advantage of Fidelity research, Simnegar builds the portfolio to roughly balance the weight of each holding. He suggests it’s a unique approach that can spread out company risk and help keep a few positions from driving portfolio results.

This process has led him to invest in companies such as Netherlands-based ASML Holding (ASMLF), which he says is building next-generation lithography equipment that helps produce smaller and more-powerful computer chips. He contends the company’s technology is difficult to perfect, which places ASML at a competitive advantage.

Elsewhere, Simnegar cites Tokyo-based Hoya (HOCPF), a company that produces medical-related equipment, primarily eyeglasses and endoscopes, but also has a substantial technology business borne out of its glass expertise. Hoya produces photomasks, or master plates made of glass and used in the production of integrated circuits. The photomasks business is a difficult field to enter, he says, since mask blanks must be perfectly flat, requiring technology expertise that few companies possess or could easily acquire. He notes that Hoya supplies industry heavyweights Taiwan Semiconductor and Samsung.

Lastly, Simnegar views China’s Shenzhou International Group (SZHIF) as a leading fabric and garment supplier to major international brands, including Nike and Adidas. He believes the company’s long-term technology and capacity advantages make it an easy choice for its customers. He thinks Shenzhou can boost its earnings in 2022 if it can overcome production and shipping-related disruptions related to COVID-19.

“In my view, these are the types of high-quality companies that U.S.-only investors are missing, but present opportunities for us for the long term, thanks to our team’s robust research capabilities,” Simnegar says.

Fidelity® International Capital Appreciation Fund held securities mentioned in this article as of September 30. For specific fund information, including full holdings, please click on the fund trading symbol above.

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Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
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