Fidelity De-FANGs: A Shift in Stock Exposure

03/03/2020 5:00 am EST


Todd Rosenbluth

Senior Director of ETF & Mutual Fund Research, CFRA Research

As U.S. growth stocks were in demand in late 2019 on renewed economic optimism, Fidelity Management & Research Company reduced its exposure to some highflying FANG stocks, notes Todd Rosenbluth, a leading analyst with CFRA Research's The Outlook.

Some of the proceeds were used to increase stakes in more defensive Health Care and Consumer staples companies, according the latest regulatory filings.

Using the Capital IQ platform, CFRA reviewed Fidelity's December-end 13-F filing and compared the holdings with the prior quarter and other periods.

Though Fidelity increased its index-based presence in recent years and has sought regulatory approval to launched active equity ETFs, it remains an actively managed mutual fund heavyweight. Below is a snapshot of our findings.

Amazon (AMZN) remains the second largest position held by Fidelity, behind Microsoft (MSFT), but the firm cut the shares it held in AMZN by 5.8% to 11.9 million shares in the fourth quarter of 2019.

Fidelity had been trimming its position fractionally in the prior two quarters but increased the selling in the final months of the year. In late January, Amazon, a Consumer Discretionary sector company, posted fourth quarter EPS of $6.47, $2.50 above consensus forecasts.

Net sales rose 21%, above AMZN's target range of 11%-20% led by the Amazon Web Services. AMZN sees first quarter sales growth of 16%- 22%, which CFRA finds as relatively encouraging for a seasonally slow period.

Meanwhile, Netflix (NFLX) is still a top-20 position for Fidelity, but the asset manager reduced its stake in the Communications Services sector company by 13% in the final three months of 2019 to 15.5 million shares.

The firm was paring back exposure throughout 2019, but the selling accelerated in the fourth quarter. In late January, NFLX reported fourth quarter GAAP EPS of $1.30 that beat the consensus view of $0.53, with an estimated $0.97 tax benefit.

Revenues rose 31%, with global average revenue per user up 9%. Operating margin markedly widened and NFLX reaffirmed its 2020 target for another 300 basis points of margin expansion.

Lastly, Fidelity trimmed its position in Alphabet (GOOGL) by 4.0% in the fourth quarter and held 10.1 million shares, the lowest share count since Fidelity initiated a position at the end of 2015 according to Capital IQ.

In contrast, Altria (MO) and Bristol-Myers Squibb (BMY) were among the more defensive Consumer Staple and Health Care positions that were boosted in the third quarter.

Fidelity's 36% Altria share count increase in the final quarter of 2019 comes just two quarters after Fidelity ended a two-year string of buying in the second quarter of 2019 with a 27% share count reduction. MO's share price rallied in the fourth quarter but has fallen to start 2020.

CFRA Equity Analyst Garrett Nelson downgraded his recommendation to Sell from Hold in mid-January amid concerns that recent federal legislation raising the minimum purchase age for tobacco presented a long-term headwind for MO.

Meanwhile, BMY's share count at Fidelity rose 31% to 49 million in the three months ended December, increasing the share count to more than eight times as high as it was a year earlier.

Fidelity began its aggressive buying in the first quarter of 2019, but the recent boost highlights the active manager's confidence in the Health Care company.

CFRA Equity Analyst Sel Hardy thinks BMY's growth prospects following the recent Celgene acquisition remain underappreciated.

CFRA rates equity mutual funds based on a combination of what's inside the portfolio and fund-level metrics, including performance and costs Fidelity Growth Company Fund (FDGRX) is a four-star multi-cap growth fund.

Despite reduced exposure at the firm level, FDGRX holds top-10 positions in AMZN and GOOGL. The fund has outperformed its peers on a one and three-year total return basis, while incurring a below-average expense ratio.

Fidelity Magellan Fund (FMAGX) is a four-star large-cap growth fund that also owns top-10 positions in AMZN and GOOGL. FMAGX is in the top quartile of its peer group on a one- and three-year basis, while also charging a below-average expense ratio.

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