Fidelity Contrafund (FCNTX)
from The No-Load Fund Investor
The stock prices of plenty of companies with good products and services, even in growing industries, occasionally get pummeled for transitory reasons and become significantly undervalued as compared to their long-term growth prospects. Managers who buy these stocks during the down times and hold them for many years can produce outstanding long-term returns for their shareholders.
Our Best Buys include one fund with an emphatic emphasis on contrarian growth: Fidelity Contrafund (FCNTX), which we include in each of our four Fidelity Funds models. During the three-year period ended Feb. 28, 2014, the fund produced an annualized gain of 15.3%, vs. 14.4% for the S&P 500 Index.
Over the past 10 years, the fund has gained 10.2% annually, vs. 7.2% for the index. Will Danoff has been the manager of Contrafund since 1990. He searches for larger companies that he believes are poised for durable multiyear earnings growth that is not reflected in their current valuations. He looks mainly for such companies with “best of breed” qualities, including those with strong competitive positions, high returns on invested capital, solid free-cash flow generation (essentially, real cash profits after funding day-to-day operations) and, of course, shareholder-friendly management teams.
Though most of the fund’s stocks are large, Danoff looks for those led by visionary leaders with entrepreneurial impulses. He’s particularly interested in companies with innovative research and development, great products and brands, and strong and increasing market shares in growing industries.
As compared with the sector breakdown of the S&P 500, Contrafund’s is heavier in information technology (28.1%, vs. 18.8%, as of Jan. 31, 2014) and consumer discretionary (19.2%, vs. 12.3%), and lighter in industrials 6.8%, vs. 10.8%), energy (4.0%, vs. 10.1%) and telecommunications and power-generating utilities (0.4% combined, vs. 5.3%).
Many of the fund’s technology stocks are tied to the Internet, operating highly profitable business models with low capital intensity. One particular area of focus within technology has been “software as a service,” i.e., the ‘cloud,’ where companies rent software, and have continual access to the latest versions. For many types of software, this turns out to be more cost effective than owning it outright and paying for updates.
Contrafund has little in telecommunications services and power generating utilities because companies in those sectors are heavily regulated and/or very capital intensive, with growth prospects that are generally low. The fund has a low percentage of assets in energy stocks because Danoff believes new supply growth of oil and natural gas from U.S. shale deposits could weigh on the price of oil, decreasing the value of conventional petroleum reserves.
Anyone considering investing in the fund should know that it has an enormous asset base: $77 billion as of the end of February. Nevertheless, the fund’s recent performance shows no sign of suffering from asset bloat, as it beat the S&P 500 in 2012 and 2013.At recent prices, the fund’s portfolio may not be especially contrarian, at least to those for whom the word conveys ‘cheap’ according to traditional metrics, including price/earnings (P/E). According to Morningstar, the portfolio of nearly 300 stocks recently had a P/E on prospective earnings of 20.3, vs. 18.2 for the Russell 1000 Growth Index. However, the portfolios of all large-cap growth funds recently averaged a P/E of 20.9, so the fund’s portfolio isn’t expensive as compared to those of its average peer.
Mark Salzinger, The No-Load Fund Investor, www.noloadfundinvestor.com, 800-706-6364, April 2014