Pessimism toward stocks in the auto industry due to concerns about the industry’s growth potential provides a compelling opportunity to accelerate investments in certain high-quality companies that appear oversold, according to Fidelity Portfolio Manager Morgen Peck.
“Autos is an area we believe has recently been misunderstood,” says Peck, referring to a slowing production cycle, competition from Chinese manufacturers and what that could mean to developed-market manufacturers, as well as their supplier base. Peck co-manages Fidelity® Low Priced Stock Fund (FLPSX) with Sam Chamovitz.
The fund’s managers have long emphasized shares of high-quality companies with stable earnings growth that they believe are mispriced, or trading at a discount to their estimate of fair value. They tend to favor growing businesses with steady demand for their products and services, a strong balance sheet, and honest and capable management.
Although auto stocks have been out of favor and investors have been discounting a rough road ahead for the foreseeable future, Peck sees value. “A bad environment is not our expectation over a longer horizon, and we have invested in some high-quality auto suppliers and cheap, cash-generative manufacturers that are buying back substantial amounts of highly discounted stock,” she explains.
Among automakers, the co-portfolio managers added Mercedes-Benz Group (MBGYY) to the fund this past year because they believe the German company’s brand relevance will remain strong, the balance sheet is pristine, the free cash flow is robust and being aggressively returned to shareholders, and the stock’s valuation has become extremely low.
“We believe the company will lead the next drive-train technology and will remain a desirable brand to consumers,” says Peck, adding that it has a lucrative van business, which also appears underappreciated by investors. “Undoubtedly, this is a cyclical industry, and the cycle could impact its near-term results, but we believe the company is currently being significantly undervalued on a multiyear view.”
Another investment Peck believes has been misunderstood is Sweden-based Autoliv (ALV), the global leader in passive safety systems, based on its dominant market share, a diverse customer base and geographic breadth.
“We believe protecting passengers will be important, irrespective of drive-train technology,” says Peck. “Autoliv has a long history of profitable growth at attractive mid-teens returns on equity and continuous cash generation. A weak cycle may temporarily hurt the company’s economics, but it won’t derail the value of the business, which we believe has been overlooked by the market.“
Peck says they’ve also added exposure to General Motors (GM) this past year. “The stock had a very attractive starting point on valuation, multiple self-help efforts to reduce losses in its autonomous and electric vehicle initiatives, and an increased focus on returning capital to shareholders,” she notes.
Overall, the co-managers are steering the fund toward its longer-term destination – three to five years down the road – by looking past short-term challenges and focusing on the core dynamics of a business in making investment choices.
“As volatility continues to impact the U.S. equity market, we believe there will continue to be many opportunities to use market dislocation to invest in companies that may be misunderstood and discounted, or to take profits by selling shares of companies when we believe the market has become overly optimistic,” she concludes.
For specific fund information, including full holdings, please click on the fund trading symbol above. Securities mentioned were fund holdings as of November 30.
Morgen Peck is a portfolio manager in the Equity division at Fidelity Investments.
In this role, Ms. Peck is the co-lead portfolio manager for Fidelity Low Price Stock Fund, Fidelity Series Intrinsic Opportunities Fund, and Strategic Advisors Fidelity US Total Stock Fund, as well as portfolios available exclusively to Canadian and Japanese investors.
Prior to assuming her current position, Ms. Peck was a domestic equity analyst at Fidelity covering small cap domestic equities. She has been in the financial industry since joining Fidelity in September 2003.
Ms. Peck earned her bachelor of arts degree in economics from Harvard University. She is also a CFA® charterholder.