Over the past month, $1.6 billion Fidelity Trend Fund ( FTRNX ) has made some big moves - both up and down, but mostly up.
The mutual fund has outperformed the S&P 500 4% to 1% in the past month, even after this week's stock market hiccup when President Trump's administration came under renewed attack. The past month's outperformance has padded the growth fund's year-to-date lead to nearly 12% vs. 7%. The fund tops 55% of its large-cap growth peers tracked by Morningstar Inc.
[ibd-display-video id=537253 width=50 float=left] What's changed in the holdings watched over by Fidelity Trend fund manager Dan Kelly? Not much. Kelley did not change his stripes. But the market rotated toward his type of holdings over the past month. Here's what happened:
In the initial postelection euphoria on Wall Street, growth-oriented names were in favor, he says. But as the first quarter morphed into Q2, investors began to worry that policy promises might not translate into government action as quickly as once expected. That gloom yielded to optimism in the past month as corporate earnings showed that businesses were doing all right after all. Investors began to pile back into growth stocks - beaten-down growth stocks, which Kelley says he largely never left.
"If I think a stock is cheap on earnings potential two, three years out, I will own it, whereas other growth managers won't," Kelley said.
Trend Fund's upturn - as well as the broad stock market's as measured by the S&P 500 - was interrupted by the Trump dump on Wednesday, sparked by investors' jitters over the quicksand that seems to be swallowing President Trump's agenda of tax cuts, deregulation and infrastructure spending.
The Trump dump hasn't moved Kelley to change strategy. "I remain focused on finding individual companies that I believe can grow earnings faster or for longer than the market expects," he said.
Kelley invests in three kinds of growth stocks, which he calls quality, secular and opportunities.
Quality-growth stocks are the core of his portfolio, Kelley says. Alphabet ( GOOGL ) and Amgen ( AMGN ) are examples, he says. "Quality stocks have proven management teams, stable earnings growth, high returns on invested capital and strong balance sheets," he added.
Optionality - or a catalyst for additional growth that many investors don't see yet - is one of the key things he looks for in any type of growth stock. In Alphabet, it is the company's work on artificial intelligence and toward driverless cars. In Amgen it is their pipeline of drugs "that I do not believe I am paying much for at today's stock price," he said.
In his secular growth bucket, he looks for "companies with high organic growth rates that are sustainable for years," he said. Facebook ( FB ) is one. So is Tesla ( TSLA ), which also has that optionality that Kelley looks for in many stocks.
Many investors are so focused on Tesla's short-term ability to sell electric cars that they overlook Tesla's longer-term picture, Kelley says. And in the longer term, Kelley sees Tesla selling mass-market as well as upmarket cars - even if the mass-market Model 3 debuts slightly behind schedule. "That's optionality, like Tesla's ability to do power storage, given their battery technology," Kelley said. "They have several avenues for further revenue and earnings."
In fact, when short-term jitters prompt many other investors to sell off a stock that Kelley likes, he often uses that as a buying opportunity. "Embracing volatility can be rewarding," he said.
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Amazon (AMZN) benefits from the secular trend of retail sales shifting online and the migration of IT spending to the cloud, Kelley says. "Given Amazon's scale and household penetration, I think Voice (which powers Amazon's Alexa, a voice-controlled personal assistant) and artificial intelligence could be an area of additional revenue optionality," Kelley said.
Stocks like Bank of America (BAC) that are expected to benefit from Trump policies fall into the opportunities bucket. "Those are companies with cheap valuations and an early fundamental inflection point, and a high probability of being re-rated (given a new price value by the market)," Kelly said. Bank of America stands to benefit from rising interest rates and a warming U.S. economy.
Apple (AAPL) is another quality growth stock. Kelley is not concerned that Apple's spending to develop autonomous-driving vehicles will stress the company's balance sheet. Remember, he says, that Apple has $200 billion in cash.
Kelley says Apple's product cycle has evolved. "Every other (Apple) product cycle is less revolutionary," he said. "We're heading into the revolutionary product cycle. It should be this fall. Maybe people will get excited about it."
Apple is launching the next version of iPhone in the fall. "I expect a combination of strong replacement demand as well as demand from new users due to further innovation on the phone," he said.
Meanwhile, Apple's services, which include the App Store, iTunes, AppleCare, Apple Music and Apple Pay, provide steady, recurring revenues.
As IBD's Patrick Seitz recently reported, Apple plans to double its services business over the next four years, reaching $48 billion to $50 billion in sales in fiscal 2020. Apple's services generated $25.5 billion in revenue in the 12 months through mid-March.