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As an investor, I sometimes go against the flow
Amid economic uncertainty, some companies unjustifiably perceived to be out of favor have become more attractively valued, according to Fidelity's Jennifer Fo Cardillo.
- While the broader economy has remained largely resilient despite many investors expecting a recession, Fidelity's Jennifer Fo Cardillo believes that some more interest-rate-sensitive segments of the market—the recreational vehicle industry, for instance—are closer to recessionary levels and potentially poised for a rebound.
- "In this environment, I'm finding compelling investment opportunities among businesses with attractive growth characteristics whose stocks are trading at depressed valuations due to investors' near-term concern," says Fo Cardillo, portfolio manager of Fidelity Advisor® Small Cap Fund.
- In running the fund, she favors firms with competitive differentiation, the ability to fund operations with stable cash flow, and a trustworthy management team, while avoiding businesses with poor earnings quality, stretched balance sheets, and unreasonable valuations.
- Fo Cardillo divides the portfolio into three categories: "steady Eddie" companies; exceptional growers; and out-of-consensus stocks, meaning those whose business prospects she believes are stronger than the market is assuming.
- Within the out-of-consensus group, Fo Cardillo prefers financially solid companies led by management teams she believes can potentially create value through corporate acquisitions or by repurchasing their own stock at an attractive valuation during a market downturn.
- She especially likes the recreational vehicle industry, given her view that the RV business cycle is closer to its low than its peak, especially if interest rates are plateauing. Her biggest holding here, at the end of August, was Patrick Industries, a leading component supplier to RV, boat, and manufactured housing producers.
- "I like the firm for its long track record of organic growth, as well as consistent ability to expand its profit margins and produce a high return on invested capital throughout market cycles," says Fo Cardillo. She believes the stock's valuation is depressed because of the market's uncertainty about when the RV cycle may bottom.
- But because of Patrick's countercyclical cash flow and solid balance sheet, Fo Cardillo feels like she can be patient while awaiting a cyclical recovery.
- Another out-of-consensus area she sees is in the financials sector, where certain companies whose earnings are closely tied to transaction activity, namely mergers and acquisitions, have piqued her interest.
- M&A activity has been largely depressed of late, due to a higher cost of capital and increased uncertainty about the direction of capital markets, she explains.
- "As transaction activity begins to recover, however, I see advisory firms such as Houlihan Lokey and Lazard, both fund holdings as of August 31, as poised for attractive relative-earnings growth, even if the market does not yet appear to fully see this value," Fo Cardillo concludes.