The stock market roared back in 2010 after disappointing performances in late 2007, 2008 and early 2009. The fourth quarter of 2010 capped off the strong rebound and mutual fund investors reaped the benefits. Indeed, the market rose nearly 11% in the holiday period, with a 6.7% advance in the month of December, alone.
We recently published a list of some of the top performing mutual funds in our Quarterly Fund Review: Fourth Quarter 2010, and growth-laden stock portfolios continued to show up at the top. Many produced double-digit returns during the three month interval.
Fidelity Contrafund (FCNTX) was among the top funds, posting a 10% gain over the three months and advancing more than 22% for the full year. (Both returns were comparable to those of the S&P 500 Index.) Contrafund is a large-cap growth offering designed to generate capital appreciation. It invests almost exclusively in common stocks. Although value is important to manager William Danoff, a prospective stock must offer more than just low valuations. It must also demonstrate a catalyst that will enhance its fundamentals before it can be added to the portfolio. New management, new product launches, dramatic cost-cutting efforts, or a possible acquisition or merger are examples of this. A prospective stock must possess consistently improving fundamentals, such as an upward trend in cash flow, increased earnings, or widening profit margins.
Although management looks for bargains, it will not hesitate to buy an issue with an elevated price-to-earnings ratio if it is justified by a similarly high earnings-per-share growth rate. Stocks that trade at a discount relative to other companies in the same industry may be bought, too. It also looks for stocks that have fallen out of favor with investors for reasons that are considered temporary or non-recurring. The fund may invest in foreign securities, but predominantly invests stateside.
Recently, Danoff has steered the fund towards information technology and consumer discretionary stocks, which at last call made up just over half of the portfolio. Although fairly diversified with nearly 500 stocks in the portfolio, he will make large bets with the top 10 holdings, which currently make up nearly 30% of the fund. Apple (AAPL) and Google (GOOG) were the largest positions at the end of December. The two dominate the portfolio, accounting for 7% and 5% of assets under management, respectively.
Apple has been on a bit of a rollercoaster ride more recently, with its shares dipping in value after CEO and founder Steve Jobs announced that he was taking a second medical leave. (See our recent article The Risk of Leadership Change: Steve Jobs Takes Second Leave of Absence.) However, strong fourth-quarter earnings, which trumped expectations, helped the equity regain some of the lost momentum. Earnings advanced 75% over the year-before mark, with gross margin improvement and momentum in China paving the way. Indeed, Chinese sales advanced 400%, as investment in the country finally appears to be paying off. Greater inroads here could be key going forward and help to lessen the speculation and questions about the company’s long-term product development prospects raised by the departure of Mr. Jobs.
Google, meanwhile, has been experiencing similar success of late. The search engine easily exceeded expectations in the fourth quarter, posting share earnings of $7.81, nearly double our forecast and 27% better than the year before. Revenues topped our assumptions, too, increasing 26%, to $8.44 billion. The latest round of results suggests that core operations will gain further momentum, while mobile search queries benefit from the explosive growth of smartphones and greater access to the Internet.
Ironically, our July 26, 2010 article, Can Android Smartphones Dethrone Apple’s iPhones, pointed out the growing competition between Contra Fund’s two top holdings, questioning whether both could sustain growing cell phone user trends, simultaneously.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned above.
