The stock market had a great run in 2013, with the S&P 500 rising 30%. But some warn that stocks now look expensive and expect a correction.
Will Danoff — manager of $US108 billion Fidelity Contrafund and considered one of the best active managers of all time — says that there are still opportunities in stocks. He sees opportunities in the consumer discretionary and tech sectors.
In the consumer discretionary space, he is looking at companies that can tap global consumers:
“I have positioned Fidelity® Contrafund® with big commitments to two sectors: consumer discretionary and technology. These sectors have been large and profitable, and therefore tend to be fertile ground for stock picking. In the consumer discretionary sector, the fund is focused on companies with strong brands, good business models, and the ability to expand overseas, and companies that are gaining market share and growing earnings. At the last date of Contrafund’s disclosed holdings, top positions in this sector included TJX Companies, the off-price retailer that has more than tripled its earnings per share since 2006; Disney, which has more than doubled EPS since 2006; and Discovery Communications, which has quadrupled earnings in the past five years.* In addition, the fund has very large positions in Starbucks, Nike, and Estee Lauder, all of which have increased EPS by more than 2.5 times in the last seven years.*
Danoff is a bit more cautious on technology considering the large number of initial public offerings (IPOs) we’ve seen and on account of disruptive technologies that makes companies more vulnerable to competition. But again he favours strong brands.:
“As in the consumer discretionary sector, the fund has favoured growing companies with strong brands and sustainable business models, and those companies that have shown evidence they can migrate profitably to the mobile Web world. Google, Amazon, and Facebook have all been very large positions in the fund.*
“…The fund’s big commitment to Yahoo differed somewhat from most of its other growth-oriented tech investments. Yahoo has been a cheap turnaround story led by new CEO Marissa Mayer. The company performed well in the past year, as the market realised that its holdings in Yahoo Japan and Alibaba were very valuable, and usage on Yahoo’s Web sites grew nicely.
“Another large opportunity in technology is in the exploding area of enterprise software. The last big shift in enterprise software came 20 years ago during the move to client-server architecture. Now, corporations are rapidly adopting the software-as-a-service (SaaS) model. With SaaS, corporate customers effectively “rent” the latest software, which is automatically updated so all users are on the latest release and customers can run the software in the SaaS vendor’s data centres if they want. Therefore, the SaaS solution is cheaper, more effective, and easier to manage than the old client-server product. As of the last date of disclosure, the fund owned SaaS players such as salesforce.com, Workday, NetSuite, Concur Technologies, and ServiceNow, and does not own any client-server dominated companies such as Oracle or SAP. SaaS valuations are high, but I am confident in the growth outlook.”
Danoff is however cautious on the energy and telecom sectors.
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