Peter Lynch popularized the dictum “Invest in what you know” as the legendary manager of the
fund. Three decades later, Sonu Kalra has his own spin on the concept: Invest in companies whose products or services customers can’t live without.
“I often ask, ‘If a company were to disappear today, how much would I miss it?’ ” says Kalra, who started as an analyst at Fidelity in 1998 and in 2009 took the helm of the $57 billion
Fidelity Blue Chip Growth
fund (ticker: FBGRX). The fund is up 20.8% a year over the past decade, better than 94% of its Morningstar large-growth peers and two percentage points a year better than the Russell 1000 Growth index. It carries an expense ratio of 0.79%, average for its category.
Although Kalra credits Fidelity’s deep bench of 150 global equity analysts with helping him identify and vet investment ideas, he believes one of the best ways to learn about a company is to use its products or services. For instance, when
(AAPL), a long-term holding in the fund, introduced Apple Pay in 2014, Kalra lined up at McDonald’s to be among the first to try it. He recently listed a used car via the online platform
(CVNA), and walked away with a successful sale and more conviction about the idea.
His research, however, isn’t always so seamless. “I’ve had instances where I’ve had to call customer service for a company and I’m on hold for 40 minutes,” he says. “I’ve gone back [to management] and asked, ‘What’s going on here?’ ”
At the same time, the majority of holdings in the fund meet Fidelity’s definition of a blue-chip company—well-known, well-established, and well-capitalized. Kalra, 49, looks for strong free cash flow, high returns on equity, and the potential to double earnings over a three- to five-year period.
He also focuses on stocks that he thinks are mispriced, both in terms of significance and durability of growth.
“The market usually overestimates the amount of change in a short-term period but underestimates the amount of change in a long-term time horizon,” Kalra says.
(AMZN) is a textbook example of this phenomenon. The company continues to grab a larger share of a growing e-commerce universe while successfully commercializing related businesses. It turned its in-house cloud services arm,
Web Services, into a multibillion-dollar business, and it appears to be following a similar playbook with its logistics network.
Along with other tech giants, Amazon is benefiting from increased digital ad spending. “As more businesses move from bricks-and-mortar to online, their version of ‘rent’ is marketing dollars,” says Kalra. The stock has been a holding in the fund since 2007, but under Kalra—who is confident Amazon will continue to innovate under new CEO Andy Jassy—it has grown to 7% of assets.
Apple is another well-known company that the market has chronically underestimated, in Kalra’s eyes. “I remember attending the launch of the original iPhone where Steve Jobs talked about capturing 1% of the cellphone market, and now they have a 20% market share,” he says.
Moreover, demand for Apple products and services—which account for a growing share of revenue—is steady and sticky. “The repeat-purchase rate for an Apple device is over 90%,” he says. “You’re not just buying a piece of hardware, but you’re buying everything that comes with it, because it works.”
|Russell 1000 Growth||36.6||23.4||18.7|
|Top 10 Holdings|
|Company / Ticker||% of Net Assets|
|Apple / AAPL||8.3%|
|Amazon.com / AMZN||7.2|
|Microsoft / MSFT||6.1|
|Alphabet / GOOGL||5.8|
|Facebook / FB||4.7|
|Nvidia / NVDA||4.5|
|Marvell Technology / MRVL||2.9|
|Lyft / LYFT||2.0|
|Tesla / TSLA||2.0|
|Salesforce.com / CRM||1.7|
Note: Holdings as of June 30. Returns through August 2; five- and 10-year returns are annualized.
Sources: Morningstar; Fidelity
Many holdings in the portfolio work so well that they are under mounting scrutiny for alleged anticompetitive behavior. Kalra and his colleagues are keeping an eye on lawsuits against Big Tech, but he notes that customers are benefiting from the services in question and still have a choice.
“No one forces me to use Amazon,
[FB], or Google,” he says. Besides, a ruling against these companies might not be a bum deal for shareholders.
“There is a case to be made that the sum of the individual businesses is actually greater than where these businesses are trading now,” he says.
While the fund’s top 10 positions recently represented more than 44% of assets and are all well-known names, Kalra routinely takes tiny positions in less-established companies he says have the potential to be blue-chip names. A case in point is
(TSLA), which the fund bought in 2010 with a 0.2% position; that has grown to nearly 2% today.
“I tend to build positions over time and also sell positions over time,” says Kalra, whose fund has more than 560 holdings.
One of the fund’s newer names is
Penn National Gaming
(PENN), a circa-1968 company that owns and operates gaming and racing facilities. In early 2020 it took a 36% stake in digital sports media company Barstool Sports, helping it tap into growing demand for online sports betting—which is now legal in 25 U.S. states—and a younger demographic. “Penn has the potential to be the next-generation sports media company,” says Kalra, who bought the stock in 2019.
As much as Kalra believes in doing his own field research, he appreciates that customer behaviors and preferences are always evolving. Here’s where the father turns to his three children—ages 12, 13, and 16—and their friends for opinions on everything from new features on
(SNAP) and shows they’re watching on
(NFLX), to the resurgence in
The teens in the house also offer valuable insight into car ownership. “I grew up in a generation where owning a car was important, but for a lot of younger people the convenience of not owning a car outweighs the convenience,” says Kalra, whose fund has significant positions in
(UBER). “After your house, your car is probably the second-most-expensive asset you own, and it’s largely underutilized.”
Both companies, he says, took advantage of pandemic-related slowdowns to improve their operations—opening doors for higher margins as ride-sharing demand recovers and driver shortages are resolved.
“I view these as marketplaces that over time will capture a larger share of the overall transportation pie,” Kalra says.