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Value and income
Going on offense in two defensive sectors: real estate and health care
- Fidelity Portfolio Manager Dan Kelley likes the total-return potential of two defensive sectors, real estate and health care, which he believes are attractively valued based on their earnings-growth potential.
- "Dividend yields on real estate investment trusts have risen, and I think earnings in the sector could meaningfully accelerate in the coming months, particularly for properties with a short-term lease," says Kelley, who helms Fidelity® Puritan® Fund.
- The fund is a classic balanced portfolio, meaning it is measured against a Composite index that consists of about 60% stocks and the remainder in investment-grade bonds. In addition to choosing stocks for an equities subportfolio that as of January 31 made up about 68% of the fund's assets, Kelley allocates money to co-managers who oversee the fund's exposure to investment-grade bonds and high-yield debt.
- Real estate has been an area of focus on the equity side of the ledger, according to Kelley. "I've particularly liked storage and apartment REITs because of their ability to increase rent," he explains, citing Public Storage and Camden Property Trust, respectively, among his holdings at the end of January.
- Kelley also has targeted certain health care stocks, especially within biotechnology. Now that the Fed has pivoted to cutting interest rates, he reasons, short-term funding costs for biotech companies should stabilize.
- Here, he's boosted exposure to companies developing products with strong prospects for commercialization, including Gilead Sciences and argenx.
- Kelley says his recent emphasis on REITs and health care is consistent with his preference for what he calls "mispriced growth." He favors companies with a forecasted earnings-growth rate that is meaningfully better than the consensus among Wall Street analysts and other investors. He adds, "I also want the stock to be reasonably valued versus my estimate of the company's earnings-growth potential."
- Outside of defensive areas, Kelley has chosen early-cycle consumer discretionary companies that he believes could benefit from lower interest rates. These include home-improvement retailers, such as Home Depot and Lowe's, as well as furniture stores.
- He's also dialed up his overweight in the financials sector, where a number of regional banks may see increased demand for loans in a lower-interest-rate environment.
- Looking ahead, Dan has an upbeat outlook for stocks. "I think the Fed's focus on keeping the economy from slipping into a recession provides a fruitful backdrop for stock picking across a broad range of industries," he says. "The outlook for corporate earnings growth remains favorable within the context of U.S. gross domestic product (GDP) growth that, in my view, will remain modestly positive."
Sectors that tend to be defensive — such as real estate and health care — have become cheaper relative to their earnings-growth potential, says Fidelity's Dan Kelley.
- For specific fund information such as standard performance and holdings, please go to the "Funds Managed" link on this page.