As earnings season begins, many market observers are sounding notes of concern that companies may struggle to produce growth. But that doesn't mean investors seeking growth won't be able to find opportunities. The key may be to isolate industries or consumer trends undergoing major shakeups, and focus on the companies that may be positioned to win in the new landscape.
Sonu Kalra, manager of the $16 billion Fidelity® Blue Chip Growth Fund (FBGRX), looks for companies that can produce double-digit earnings growth. He says that cyclical stories may have stalled, so he is looking for growth tied to an active lifestyle, health care reform, and mobile advertising.
Stocks have had a great run. What do you think will happen next?
Kalra: Over the last 50 years, the market has traded an average price of about 15 times earnings. Recently the market has traded slightly above that level. I wouldn’t say stocks are expensive, but I’d say we’re certainly paying fair value.
This doesn’t mean that stocks can’t continue to deliver earnings growth. In this low-interest-rate environment, I think the backdrop is still pretty attractive for equities overall—and for growth stocks in particular.
With the exception of commercial real estate construction, my exposure to cyclical stocks such as housing and autos is less today than it was last year. From my point of view, the economy just doesn't have the tailwinds that it had previously. Instead, I’m focused on companies tied to secular growth trends that I believe can produce double-digit growth despite the sluggish economy.
What growth themes have you been focused on?
About the expert
Kalra: Consumers are increasingly focused on health and wellness. As society ages, people are more concerned with living a better and, hopefully, a longer life. This is playing out in many different areas on the consumer side. One area is in what we eat, in terms of a preference for organic and natural foods. Whole Foods (WFM) is an example of a company that provides a whole experience around all-natural and organic foods. Within dining, Chipotle Mexican Grill (CMG) has really built its foundation around serving food that is healthier than some of its fast-food competition. For example, it has a non-GMO pledge and serves antibiotic-free chicken.
We have seen a trend toward activewear in clothing and a strong footwear cycle the last few years. Nike (NKE) has been a big beneficiary of people simply becoming more active. Under Armour (UA) has also benefited and has a stronger position with a younger demographic. Under Armour is just starting to expand geographically outside the United States, so that’s a pretty big opportunity for the company to replicate some of the success it has had here in the United States.
What about health care?
Kalra: There should be significant growth opportunities for companies that can help solve the health care problem by bringing down costs for the system overall. These companies may include names in the biotech arena like Gilead (GILD), which has a new drug in the market that cures hepatitis C. We are also seeing a trend of biotechnology companies partnering with traditional pharmaceutical companies to distribute drugs as they are approved. Companies including Cerner Corporation (CERN) and athenahealth (ATHN) are helping to digitize the medical system, creating electronic medical records and tools to automate the entire supply chain in the health care process.
Biotech and health care have had a strong run, so investors need to be careful. Valuations for larger biotech companies have largely been stable, but we have seen prices for smaller companies run up significantly in recent months. I think we need to go name by name at this point.
One trend investors have been watching is the growth of social media, but valuations there have gone up. What is your take?
Kalra: To me, the big question is not if a company is social. What I really want to know is how exposed a company is to the trend toward a digital, mobile lifestyle. Consumers are spending 40% of their media time on digital, and about 15% of media time is spent on mobile devices now. But digital advertising garners just about 20% to 25% of ad dollars, and mobile advertising garners only 3% of ad dollars. I think we will continue to see that gap close, because advertising dollars tend to follow current trends.
I have been trying to focus on companies that benefit from this shift in advertising and have strong positions in mobile. Some of the top holdings in the fund as of December 31, 2013, included Google (GOOG) and Facebook (FB), which have benefited directly from advertising, and Qualcomm (QCOM), which makes chips that go inside all these mobile devices. From an infrastructure standpoint, NXP Semiconductors (NXPI) and Altera (ALTR) have benefited from the rollout of these new technologies across the world.
Even though stocks like these are definitely well recognized today, I still think there may be opportunity in the space.