Wed, 3 Oct 2012
The decrease in the tech giant's shares are no cause for concern, says Fidelity manager Sonu Kalra, who suggests looking at past correlations between Apple's price movement and product cycles.
Christopher Davis: Hello, I'm Christopher Davis, a senior mutual fund analyst with Morningstar. I'm here today with Sonu Kalra. He is the manager of the $15.7 billion Fidelity Blue Chip Growth fund. He took over in 2009 and has fared quite well so far at the helm. I'm here today to ask him a few questions.
Sonu, you obviously, as the name of your fund implies, cover blue-chip stocks. Especially, over the past year a lot of blue-chip stocks have seen big runups, especially if they pay dividends, as investors have sought income, safety, stability. What does your playing field look like now? Are opportunities relatively scarce?
Sonu Kalra: Well, Chris, it's actually a great time to be investing in the market from my standpoint of view. It is opportunity-rich environment as how I kind of describe it. We've had a decade plus of a low-return market. Basically the market has been flat for the past decade plus, and when you look at valuations relative to historic norms, valuations are in the bottom half of historic norms. So, from a valuation standpoint things look good. When you look at high-quality stocks, in particular, they are actually trading at a discount to the market for the most part. And when you look back at history, most of the time large-cap, high-quality, dividend-paying stocks trade at a premium, and so we are in a pretty good environment for stock-picking right now.
Davis: Is this discount reflective of the fact that investors think earnings are at peak levels or at least near them there is a skepticism about the future of the economy with lots of macro headwinds out there?
Kalra: I think that's really good point, Chris. I think you touched on a lot of headwinds that the market is taking into account and hence where we are from valuation standpoint. As a portfolio manager, I work real closely with our global research team, scouring the world for ideas that we think can grow in a slow-growth environment like we've seen, and we've seen many companies over the last decade that have been able to demonstrate pretty healthy growth rates despite a relatively weak economy. So, I think, there are still a lot of opportunities out there.
Davis: One of those companies that had an outstanding decade and an outstanding year is your top position, Apple. You have around 10% of your portfolio in the stock at least as the most recent release date. So, I'm wondering, this is one of the most widely followed stocks in the world. What edge do you have in covering the stock, and where do you see its growth opportunities? How do you see it differently than the rest of the world?
Kalra: I've had a long history with Apple. I actually used to cover Apple as an analyst coming up the ranks at Fidelity. So, I've had the benefit of watching its track record of innovation, and that's really what I pay attention to is Apple's ability to innovate. Apple has demonstrated that it's done a fantastic job of entering new markets and improving market share. Clearly, it has become a much larger company today, but there's also lot of opportunities around the world for Apple to expand. So, those are some of the things that I'm thinking about as I think about Apple in particular.
Davis: The iPhone 5 recently came out. It sold I think around 5 million handsets in the first weekend alone, and after that great news Apple’s stock went down. Is that indicative of the fact that investors' expectations for Apple are pretty high?
Kalra: Well, I think you have to put these numbers in perspective. You also have to look at what Apple stock has done historically going into product cycles. So, the fact that it's down post the release of the iPhone 5 isn't a surprise actually when you look back at history. Usually the stock runs up to the announcement or the release of a product cycle and sells off [after the announcement] in terms of people are buying the rumor, selling the news. And that's what we've see on a short-term basis. Long term, I think Apple’s success will be dictated by its ability to innovate.
Davis: I know that the core of your portfolio is dominated by these very high-quality blue-chip types of names. In Morningstar parlance, they have economic moats. But in that you devote another smaller part of your portfolio to up-and-comers, future blue-chip growth companies. Do you have an example of an up-and comer, not Apple, but has the potential to be a future big player?
Kalra: Yes. One of things that I try to do is work with the analysts to identify what we think can be companies that can become blue chips in the future, like you mentioned, and incorporate those in a smaller way into the fund. One of the companies that I think that could fit that bill in the future is Tesla Motors. This is a company that is fairly young; it's only a few years old and had its IPO in 2010. It's an electric vehicle maker. It just released its first mass-market commercial vehicle, the Model S, which is just hitting the market now. And the interesting thing about it is that you can drive up to 300 miles on a single charge. So, it doesn't run into some of the issues that the other electric vehicles have. And Tesla is targeting the luxury market, which I think is a very unique strategy for the company. If it can capture just a few points of market share within that luxury segment, this will be a much bigger company in the future than it is today.
Davis: So, Tesla has a completely different strategy than the Chevy Volt, which is aimed more at the mass market?
Kalra: Exactly. The Chevy Volt was basically a mass-market car priced at a luxury segment. The Model S is a luxury car aimed at luxury buyers, and I think once they see the car, people will be wowed by it.
Davis: All right. Well, thank you, Sonu, for joining us today.
Kalra: I really, appreciate it. Thanks for having me.
Davis: I'm Christopher Davis with Morningstar.com.