by - Lead fund manager Matt Fruhan has seen success this year by continuing to prioritize valuations.
- His strategy involves finding fundamentally strong companies with incorrect prices.
- Here are four parts of the market that Fruhan is most optimistic about right now.
For years, Matt Fruhan was one of the few large-cap fund managers to make stock valuations a priority. During the euphoric bull market of the late 2010s and into 2020 and 2021, taking such a measured approach often translates into underperformance.
“Sometimes it can be painful,” Fruhan said in a recent interview with Insider. “You look like a fool when stocks are going up and you’re not joining the party.”
Fast forward 18 months and it’s Fruhan who has reason to celebrate. The Fidelity Investments portfolio manager is the mind behind three large-cap mutual funds that are currently among the top 10 absolute performers over the past 12 months, according to Kiplinger.
Two of these outstanding funds, the Fidelity Mega Cap Stock Fund (FGRTX) and the Fidelity Advisor Mega Cap Stock Fund (FGTAX), are virtually identical except for their class and code. The third, the Fidelity Growth & Income Fund (FGRIX), is focused on dividends.
Of the three, the Mega Cap Stock Fund fared best, according to Morningstar: It’s been in the top 1% of its category over the last three years, after outperforming 93% of its peers last year. And while the fund’s performance is difficult to replicate, Fruhan said the strategy he uses is quite simple.
How to Succeed When Investing: Prioritize Fundamentals and Valuations, Then Be Patient
Fruhan is not the type to reinvent the wheel. The fund manager told Insider that he applies the same investment process and principles across all of his funds. And, as his position on valuations illustrates, he is unwilling to bend his convictions on the basis of what is currently favorable.
“What I do doesn’t change based on what other investors in the market are doing,” Fruhan said.
When looking for stocks, Fruhan explained that he does deep fundamental research on a company to try to imagine what its earnings and earnings will be like in three to five years.
Rather than trying to put stocks in a “growth” or “value” basket, the fund manager said he determines what is driving his earnings. Some companies can increase their earnings regardless of what is happening in the economy, while others have more cyclical businesses.
He went on to say that it’s vital to see how investors are evaluating that future growth in the present.
“Investment valuation is really critical for me,” said Fruhan. “When you’re in your real life and you’re away from your job and you’re going to buy a car or a pair of jeans or you’re going to buy a cup of coffee, you think about the price you’re paying. You’re paying with what you get back. And when you show up to work and invest other people’s money, it seems like you probably still should be concerned about the price you’re paying for a stock.
There is no single way to gauge a company’s future earnings, Fruhan said. Instead, he thinks the valuation metrics used to judge a stock should depend on the industry it’s in. For example, he said it makes more sense to value banks based on tangible book value rather than free cash flow.
After Fruhan found stocks attractive through fundamental analysis and looked at their valuations, he said the third step is to remain patient. The turnover rate of his Mega Cap Stock Fund is just 3%, which means that, on average, he sells less than three of his 96 holdings each year.
“Some investors are kind of market-reactive and let the market tell them what to think,” Fruhan said. “I try to take what the market offers and be proactive and say, ‘Well, the market is suggesting this in a stock, which means that a group of investors – a market – collectively think this, I think the opposite.”
Fruhan continued, “I do a lot of research. I won’t always be right, but when I’m right I should be able to take advantage of it. And that’s how you separate yourself from the stock market over time.”
4 places to put your money right now
While many fund managers think that smaller stocks are more likely to be undervalued, Fruhan is confident that there are many attractive opportunities in the biggest companies in the market.
Fruhan said stocks in four sectors look attractive right now: commercial aerospace, energy, SoftwareIt is finance. And while the portfolio manager didn’t mention the stocks he likes within each group, a look at his fund’s top 10 holdings shows ways to play each trend.
Aircraft manufacturers have suffered from what Fruhan called the “global travel depression” caused by the pandemic. And while the recovery in air travel is well underway, if not complete, Fruhan said the expansion cycle could last longer than investors expect. Two of its top holdings that could benefit from the travel renaissance are General Electric (GE) and Boeing (BA).
The energy sector is another part of the market that was crushed during the COVID-19 outbreak, although it has performed admirably since then. But despite the massive increase in energy and the inevitable transition to renewable sources, Fruhan believes the group has more advantages. Oil prices will remain high, in his view, as global demand for energy still far outstrips supply.
“Part of my being overweight in the energy sector has been my belief that the imbalance between supply and demand can last longer than other people in the market think,” Fruhan said. “And if that’s true, we’ll have more earnings and cash flow for longer than the market thinks, and that could be an attractive place to be.”
It’s no coincidence that the biggest holding in Fruhan’s mega cap fund is oil giant Exxon Mobil (XOM), which trades at a palatable 7.2x earnings while offering a 3.4% dividend yield.
Many investors associate mega-caps with technology, although Fruhan noted that not all technology stocks are equally attractive. He is more constructive towards software companies than consumer-focused tech companies, as recurring revenue streams are more reliable in an uncertain economic environment. With software companies of enviable scale, Microsoft (MSFT) and Alphabet (GOOGL, GOOG) are two of Fruhan’s top holdings.
Finally, finance is Fruhan’s second-largest sector, with 17.2% of his background, although the group has its share of challenges at the moment – highlighted by the regional banking crisis.
Interest rates have gone from a tailwind to a tailwind for this sector, he noted, although strong selling in recent months could present buying opportunities for bold investors. Three of Fruhan’s top holdings are Wells Fargo (WFC), Bank of America (BAC) and JPMorgan Chase (JPM).
