Investor's Business Daily, June 6th, 2007
Peter Saperstone likes to bet big on his best ideas. "The way I describe my investment philosophy is basically this: I believe high conviction in my top performers can result in outperformance," he said.
That's how he runs his Fidelity Advisor Mid Cap Fund.
The $8.4 billion portfolio FMCAX held 73 stocks as of March 31. Its 10 largest names accounted for 38.6% of fund assets. His top 20 can take up as much as 70% of his money.
"My top 20 will drive fund performance," Saperstone said. His is no closet index fund, he adds. He seeks buys from a pool of 2,000 mid-cap names. He does not confine his hunt to just 400 or so members of key mid-cap benchmarks.
His focused approach usually works. Going into Wednesday, the fund was up 13.05% so far this year. Its mid-cap growth rivals tracked by Morningstar averaged a 13.60% gain. The S&P 500 was up 8.80%.
Over the past three years the fund's average annual gain was 16.89% vs. 14.68% for its peers and 12.96% for the S&P 500.
Saperstone says his approach is growth-oriented, but he always tries to pay as little as possible for a stock's earnings. As a result, the portfolio ends up with two types of stocks.
"One type is companies with clear earnings power," he said. "The other type is out-of-favor stories."
Earnings power stories make up two-thirds of his holdings. But don't be fooled by the fallen angels that account for the remaining one-third. They don't reveal any secret desire on his part to be a value investor.
"They're really growth stocks, too," he said. "We think their long-term earnings growth will be above the market. They just don't look it to a lot of investors at the time we buy."
An example of that was Navteq NVT, a top buy as of the fund's latest disclosure. The firm provides digital map data used in navigation systems.
Takeover Trouble
In early 2006 the firm said it would take over gedas MapIT. The unit of gedas Mexico was the leading digital map provider in Mexico. In mid-April Navteq stock traded up to nearly 56. On April 26 the company announced record first-quarter revenue, but an 11% plunge in earnings per share. Shares lost their way and wandered down 12.12 the next two days, a 22% tumble. EPS fell another 7% in Q2. By late August shares were trading below 24, less than half of their mid-April high.
"Navteq got overly punished for an acquisition the market didn't like," Saperstone said. "Growth slowed a quarter or two. But that short-term change didn't impact long-term prospects. We went in and got a good growth stock at an attractive price."
Now trading around 44, the stock is up 25% so far this year.
Juniper JNPR, a top holding of the fund, was another stock Saperstone bought when other investors had cooled on it.
Juniper is the second largest router maker in the world. It's a big beneficiary of growth in telecom data traffic. But a year ago it had seen EPS slow down for four quarters.
"A year ago it got as low as about 12," Saperstone said. "We bought it late last year. Its valuation was attractive and I thought its earnings power was still strong."
Trading now around 25, the stock is up 30% this year.
Agilent Technologies A, a top holding and top buy, is an earnings power story.
The company makes testing and measuring devices. The fund was buying it in mid- to late '06.
"This was a good company in a growing industry," he said. "They had good products and were growing market share."
Agilent also has $2.05 billion in cash on its balance sheet. It had $1.99 in cash flow per share last year. That's helping to pay for stock buybacks, Saperstone said.
Also, firm margins are growing faster than its industry's 6% pace.
Harman International HAR, another top holding, is up 18% this year. The stock gapped up 19% on April 26 on takeover news.
The firm sells music and infotainment systems to car makers. Its products include navigation systems. About 10% of cars have built-in navigation systems. "That's a low-penetration market, which will get more penetrated over time," he said.
