Doubling down on quality when the market gets volatile
Fidelity’s Dan Sherwood has taken advantage of periodic market volatility to invest in higher-quality companies when they reach an attractive valuation.
- This year’s shifting tariff landscape, along with heightened geopolitical risk around the world, have fueled an increase in equity market volatility and led to attractive prices for higher-quality companies, according to Portfolio Manager Dan Sherwood.
- “I‘ve been using periods of elevated market volatility to upgrade the quality of the portfolio,” says Sherwood, who manages Fidelity Advisor® Mid-Cap Stock Fund. “For the stocks that I’ve lost confidence in, I’ve trimmed and redeployed the capital into new ideas in which historically I’ve been unable to get comfortable with the (previously elevated) valuation.”
- In managing the diversified domestic equity strategy, Sherwood focuses on companies valued at $1 billion to $10 billion across the growth-to-value universe. He favors fundamentally strong companies in which Fidelity’s earnings forecast deviates from Wall Street’s consensus; compounders, where he has a differentiated view of the sustainability of the growth rate; and mean-reversion stocks, where he challenges prevailing assumptions on the timing, duration or magnitude of the cycle.
- A high-quality company that Sherwood says he’s favored is online pet food retailer Chewy. The backstory here is that this stock thrived during the COVID-19 pandemic, he explains, when everyone was sheltering at home and there was a huge increase in pet ownership. Then, as the pandemic eased, Chewy’s business fell off sharply, and the firm had a couple of weak years.
- “Chewy has recently returned to earnings growth,” Sherwood notes. “Yet I believe the market is undervaluing the company’s improved prospects – particularly given its minimal exposure to tariffs.”
- Commvault Systems is another somewhat recent addition to the portfolio. The company is a provider of on-premises and cloud data storage and recovery technologies. Like many software firms, Commvault has undergone a transition the past few years from one-off product sales to a subscription program, enabling steadier revenue and earnings growth, according to Sherwood.
- “When these two stocks pulled back on general market weakness, I saw an opportunity to purchase them at more-attractive valuations,” says Sherwood. “Each represents my recent efforts to invest in high-quality companies that I believe have a path to better-than-expected revenue and earnings.”
Securities mentioned were fund investments as of July 31.
Fidelity Advisor Mid-Cap Stock Fund (FMCQX)
Seeks long-term growth of capital.
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