by Fidelity Investments
Key takeaways
- COVID, inflation, and supply chain backups are likely to be hurdles for investors in 2022.
- In order to meet these challenges, Fidelity's portfolio managers are looking for companies with free cash flow and pricing power.
- High-quality dividend payers and low-volatility stocks are a focus in Fidelity's equity income strategy.
There are seasons when virtually all stocks rise. Then there are times when mounting headwinds make smart stockpicking a particularly precious skill. 2022 may be one of those times given a swirl of headwinds. Among them: a new COVID variant that threatens to slow global growth, supply chain bottlenecks, rising inflation, and expectations that the Federal Reserve will raise interest rates.
How to navigate the headwinds? Three veteran Fidelity fund managers—one focused on growth, one focused on undervalued quality stocks, and one on income—share their strategies, plus some individual stocks they're feeling bullish on as 2021 ends.
Sonu Kalra
Portfolio manager, Fidelity ® Blue Chip Growth Fund (FBGRX)
The consumer is in a very good spot in terms of their balance sheets. And corporate profits are at all-time highs again. So I think the market can climb the wall of worry, but I'm cautiously optimistic. We've had some very strong years of stock market performance, so we may have pulled forward some returns. Given that valuations are at the high end historically, it's really hard to make a case for multiple expansion (prices rising faster than earnings).
With plenty of spending still pent up from the pandemic, the fund continues to overweight the consumer discretionary sector. Other sectors that may continue to be standouts in 2022 are technology and communication services. Here are 3 themes I am focused on as I look for standout large-cap investments in 2022.
1. Supporting the digital future
The pandemic fast-tracked the trend toward digitization. I think that will continue and corporations are accelerating their moves toward a more digital future. I think companies that can help accelerate that trend are positioned well.
One of those companies may be Nvidia (NVDA). This is a semiconductor maker at the heart of what I call the artificial intelligence revolution. Companies are recognizing that they need to know more about their customers and to have the ability to predict the future, so to speak. Nvidia is the supplier of chips that enables companies to start to do that. They also provide chips for autonomous vehicles.
2. Helping people get back to work (and to other destinations)
Another area I believe could benefit in 2022 is ride-sharing. Lyft (LYFT) was hit very hard during the pandemic because of the lack of mobility. They've focused internally during this time and restructured their operations. They're a lot more efficient and have turned profitable at present, and at better volumes than they were pre-pandemic.
3. A boom in home improvement
Though many people are itching to travel, I believe people are going to come home and realize that they want to continue to invest in their homes. Lowes (LOW), I think, is well-positioned to take advantage of that trend.
Plus, a new management team came in about 5 years ago. They've done a really nice job of refocusing internally, and improving operations and inventory management, and, most importantly, improving profitability.
Securities mentioned were fund holdings in FBGRX as of September 30. For specific fund information, including full holdings, please click on the fund trading symbol above.
Morgen Peck
Portfolio manager, Fidelity ® Series Small Cap Opportunities Fund (FSOPX), Fidelity ® Stock Selector Small Cap Fund (FDSCX)
Historically, small caps, especially small-cap value stocks, have tended to do particularly well in inflationary periods. Over the past year, financials, energy, and consumer discretionary stocks all have been contributors to the Russell 2000's performance.
But recently, uncertainty around inflation and supply chains has created a lot of volatility for some small-cap stocks. Looking ahead, I see 3 areas of opportunity.
1. Strong brands in competitive positions facing supply chain issues
In my view, these are great buying opportunities because the stocks are getting penalized for something that should be temporary.
Take Masonite (DOOR), a company that manufactures doors for houses and commercial buildings. They have a very strong competitive position in a consolidated market, and they have benefitted from robust demand for doors as the US housing market remains healthy. They're also vertically integrated—so they design, manufacture, and distribute their products. It doesn't require a lot of capital to grow so they generate a lot of free cash flow, which is another hallmark for me when I'm trying to find higher-quality businesses.
They're one of the many companies that face this temporary issue of missing sales due to supply chain issues. I've been able to buy more of the stock at an attractive valuation because the market's just being very shortsighted.
2. COVID beneficiaries that are now undervalued
Many companies flourished during lockdowns and the long periods of staying at home through the pandemic. Now, with the world slowly reopening, those stocks may have been sold a bit too hastily.
Nomad foods (NOMD), a consumer goods company, is one example. They sell frozen foods to grocery stores in Europe. Obviously during COVID, no one was going out to restaurants. And Europeans like to pack their freezers, so Nomad was a beneficiary.
The frozen food category in Europe doesn't grow fast, but when you're talking about food, any growth is good. Nomad has pricing power. They lead with innovation. And management runs the business very efficiently.
3. Companies with pricing power to help manage through inflation
Businesses with the ability to set prices competitively may have an advantage in an inflationary environment.
One name that I owned prior to the inflation concerns is a chemical distributor called Univar Solutions (UNVR). They are actually the largest chemical distributor in the US with just under 20% market share.
They sell into different markets like consumer, refining, and industrial, so they have a broad exposure to the economy. As a distributor, they also have a very variable cost structure, which means they can generate a lot of free cash flow, and don't require a lot of capital expenditures to grow.
Securities mentioned were fund holdings in FSOPX as of September 30. For specific fund information, including full holdings, please click on the fund trading symbols above.
Ramona Persaud
Portfolio manager, Fidelity Global Equity Income Fund (FGILX)
In this fund, I tend to be more conservative than funds oriented toward growth. My goal is really strong downside protection and reasonable upside market participation. Shaping my approach to investing in 2022 will be making the most of rising inflation and interest rates. Here are 3 investment themes I am focused on for 2022.
1. Finding high-quality dividend payers
To the extent I can get opportunities for real pricing power, therefore real dividend growth and reasonable valuation, that's where I'll focus in an environment where we have to be more sensitized to inflation.
Looking at valuation can help ensure that the companies are high quality. When interest rate increases are expected, high-dividend-yield companies struggle a little bit more. So I tend to be careful and use valuation as a guide to figure out where to land.
(To learn more about valuation and dividend yield, read Viewpoints on Fidelity.com: Help beat inflation with dividend stocks)
Currently, I see opportunities in financials, energy, and utilities. There's pretty good dispersion there, which means there is a lot of variation in how different companies within those sectors are priced. So the stockpicking skills of an active manager can add value.
2. Sticking with low-volatility stocks
Because the equity income fund also aims to manage downside risk, I'm focused on keeping the beta under 1.0.
The term "beta" is simply a measure of a stock's sensitivity to the movement of the overall stock market. The beta of the S&P 500 is expressed as 1.0.
Within financials, for example, I tend to own big- and medium-sized banks and avoid very small ones. Wells Fargo (WFC) and JPMorgan Chase ( JPM) are 2 examples of big banks the fund held positions in.
Within energy, I have owned the integrated oil companies—for instance, Exxon (XOM) or even the oil sands companies up in Canada—because those are the lower beta parts of the energy sector.
Securities mentioned were fund holdings in FGILX as of September 30. For specific fund information, including full holdings, please click on the fund trading symbol above.
Keep an eye on the long term to weather uncertainty
As the past 2 years have shown, the best-laid plans can be undone by forces beyond anyone's control. Investors with a long time horizon may find some comfort in the fact that there's a 50% chance the market will go up on any given day. "But if you extend that time horizon to 5 years, historically the market has gone up 80% of the time. Over 10 years, it has historically gone up 90% of the time," according to Kalra.
With those kinds of odds, in today's inflationary environment, investing in stocks may make a lot of sense.
