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Wymer: Why Competitive Advantage Is Key When Picking Stocks

Steve Wymer from Fidelity talks about differentiating between companies that are innovating and providing value for shareholders.

Kevin McDevitt: Hi, I'm Kevin McDevitt with Morningstar. We're here at the Morningstar Investment Conference, and I'm joined by Steve Wymer from Fidelity.

Steve, thanks for being here.

Steve Wymer: Glad to be here.

McDevitt: Steve is the lead portfolio manager at Fidelity Growth Company. I want to ask you a couple of questions about the types of companies you like to invest in and how you differentiate. In particular I want to know, how do you differentiate between let's say a promising innovative company that's doing something interesting and exciting versus one that’s also being innovative, but that you think has a better shot at capturing value for shareholders.

Wymer: I think it all comes down to when someone's either innovating or moving their business forward is, are they going to gain a real competitive advantage. If one person has the innovation, whether it's a patent or some know-how, time to market advantage, scale advantages, or other things like that that's differentiated from the market, they are probably more apt to capture value, whereas if five people have the same insight, five people have the same know-how, five people have similar time to market, and no different distribution advantage, it might be a little bit more competitive. Therefore, perhaps lower returns for that investment.

McDevitt: When you are talking about things like first to market and with so many technology plays these days, it seems like there is big network effect in place or there can be if you are the first to market. Talk about it that a bit. Do you see it with all the companies?

Wymer: I'd say the first to market's been magnified quite a bit in the digital phase. You can network a lot easier digitally then you can in the real world.

McDevitt: Let's talk also a bit about companies that again are being innovative, but may not be profitable yet. How do you get comfortable with companies like that?

Wymer: Sometimes you have to invest ahead of the curve and so therefore if you don’t have a core business, you generate losses before you go forward. What we're always doing whether it's for existing company or for something more in a startup phase is we are looking at discounted future cash flows. We are looking way out in the future, what those profits can be what those cash flows can be, then discounting it back to the future. Sometimes we just start from a loss position and that's part of the equation.

McDevitt: Do you have like a threshold in mind? I mean are you willing to wait say two, three, five years is it dependent on the company. What are the things you take into consideration?

Wymer: It depends on the company and the industry. An area where development typically has taken longer has been the healthcare industry. The development there because of human safety involved, due to regulations involved, trying to get through the government's approval both in the U.S. and around the world, those are longer term processes. Many times, it could be a decade or longer process. Whereas if it's digital it could be a lot quicker in the physical world, it's usually somewhere in between.

McDevitt: Lot of these case I know you do invest in IPOs, you invest in secondary offerings. How much are you also looking at burn rate, how quickly a company is going through it's capital and how it's also using its capital?

Wymer: Burn rate is part of equation. Burn rate tends to add dilution or takes away cash. It can lend itself to dilution and dilution means there is less for the shareholder. It's part of the equation.

McDevitt: Great. Steve thank you so much for your time.

Wymer: Thank you.

McDevitt: Thank you for watching.

Kevin McDevitt does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.