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Portfolio Manager Insights
Finding value plays in a surging market
Some pockets within the health care and industrials sectors show promise based on underlying fundamentals, says Fidelity’s Matt Friedman.
- Fidelity Portfolio Manager Matt Friedman is optimistic about select health care and industrials stocks, viewing them as attractive relative to their earnings growth and free-cash-flow yield.
- “My research points to several high-quality, underappreciated names in these sectors, explains Friedman, who helms Fidelity Advisor® Value Strategies Fund. “Their combination of depressed stock prices and solid cash generation suggests they’re undervalued.”
- Friedman manages the mid-cap value U.S. equity strategy based on his belief that “cheap” stocks outperform “expensive” stocks over the long term, with a particular focus on price-to-earnings ratio and free-cash-flow yield. He seeks higher-quality companies with strong competitive positions and a track record of generating superior returns on invested capital.
- The struggles of health care stocks this year – driven by policy uncertainty and a shift among many investors toward growth-oriented investments − have created potential opportunities for value-oriented investors, according to Friedman.
- As an example, he points to Lantheus Holdings, a manufacturer of diagnostic and therapeutic products, and a fund position established in March. The stock has substantially declined since, amid concerns about competition and anticipated integration costs from acquisitions, he explains.
- “I don’t think the stock reflects the company’s growth catalysts as of October 31 – including its pipeline and Alzheimer’s diagnostics – and trades well below the market and its peers,” he says.
- Friedman also has favored Molina Healthcare, a stock that has been depressed due to concerns about potential cuts to Medicaid.
- In industrials, while many stocks seem overextended, Friedman is focusing on a basket of names he thinks are mispriced due to their cyclical nature. These include equipment rental supplier Herc Holdings and Allison Transmission Holdings, a manufacturer of commercial-duty automatic transmissions. Both were notable positions in the portfolio at the end of October.
- Looking ahead, Friedman is somewhat cautious. “Stocks look expensive to me overall, trading at about 21 times their earnings per share, on average, so I’m being even more selective about investment opportunities I pursue, while the fund continues to hold stocks that remain deeply undervalued relative to the broader market.”
FEATURED FUND
Fidelity Advisor Value Strategies Fund (FASOX)
Seeks capital appreciation.
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