FMR LLC, also known as Fidelity Investments is one of the largest institutional investors in the equity market. Established in 1946 by Edward C. Johnson, the company serves more than 20 million individual and institutional investors. Fidelity is a truly global investment titan with near $1.5 trillion of assets under management. The company offers brokerage accounts, retirement services, college savings accounts, life insurance and annuity services, as well as, professionally managed accounts. Fidelity's most actively managed equity fund, Magellan, has near $20 billion in assets. The legendary fund manager, Peter Lynch, was the director of Magellan fund between 1977 and 1990.
According to Edgar Online, Fidelity has a well-diversified portfolio of U.S. equities. Technology stocks constitute 19% of the holdings, followed by service companies (18.4%), and financials (15%). In the third quarter, Fidelity made significant transactions. I have analyzed the 5 Big Sells, and 2 Big Buys from a fundamental perspective, adding my O-Metrix Grading System where possible:
Big Sells | ||||
Company | Shares Held | % Change | % of Portfolio | O-Metrix Score |
Apple (AAPL) | 1.93 million | -96.13% | 0.16% | 7.85 |
Medco Health (MHS) | 9.16 million | -76.89% | 0.11% | 5.20 |
Royal Dutch (RDS.A) | 78.30 million | -16.75% | 1.19% | 5.50 |
Goldcorp (GG) | 61.72 million | -22.02% | 0.69% | 2.73 |
AT&T (T) | 34.37 million | -41.46% | 0.21% | 3.54 |
Big Buys | ||||
Microsoft (MSFT) | 131.43 million | 56.54% | 0.72% | 7.33 |
Franco Nevada (FNV) | 19.60 million | NEW | 0.17% | N/A |
(Data from Finviz/Morningstar and is current as of December 7. You can download O-Metrix calculator, here.)
The fair value is calculated according to the following formula (adding book value gives the upper boundary):
- Fair Value = E0 + E1 / (1+r) + E2 /(1+r)2 + E3/(1+r)3 + E4/(1+r)4 + E5/(1+r)5 + Disposal Value + {Book Value}
O-Metrix score is calculated as:
- O-Metrix = 5 x (Dividend Yield + Expected EPS Growth) / PE Ratio
Big Sells
It is quite interesting to observe that Fidelity managers have almost sold-off Apple holdings. While the investment titan still holds near 2 million shares worth $750 million, this is much lower than the previous quarter value of near $20 billion. It is my humble guess that after making significant returns in this year by means of Apple, Fidelity managers decided to re-adjust their portfolio towards underperforming stocks.
Nevertheless, I still believe that Apple has a long way to reach its fair value. Based on 19% EPS growth, my fair-value range for Apple is $666 - $750. The stock has a near A-Grade O-Metrix score of 7.85. Thus, Apple has at least 70% upside potential to be fairly-valued. Do not expect this to happen over a short period. However, it is highly possible that, if analysts’ estimates hold, Apple might easily double the market average, returning above 20% annually for the long-term investors.
Medco Health Solutions is a major drug retailer that also offers clinically-driven pharmacy services for institutional and individual customers. The stock has been highly volatile in this year, bouncing between $45 - $65 ranges. Fidelity reduced its holdings by near 77% in the last quarter.
Medco is trading with a trailing P/E ratio of 16.73, and forward P/E ratio of 12.72. Although it is highly volatile, with a relatively low Beta of 0.72, its performance is not much correlated with the market. The stocks volatility has much to do with its merger intention with Express Scripts (ESRX). The merger is claimed to benefit the customers by offering safer, better, and more affordable pharmaceutical coverage care. However, investors should note that the merger agreement is subject to approval by the antitrust committee. In any case, Medco looks undervalued at a price of $58. My fair value range is $70 - $79 per share.
Royal Dutch Shell has recently announced that it sold its oil leases in Nigeria to local companies for a deal worth near $500 million. The profits from this sale will boost the already profitable balance sheet. However, Fidelity reduced its stake in the company by 16.75% in the last quarter.
The industry outlook for giant energy companies are almost perfectly correlated with the oil prices. Swings in crude oil futures are instantly reflected in the stock prices of major oil companies. That is the primary reason, why big oil giants are priced at significant discounts. RDS is no exception. The stock is trading at a dirt-cheap trailing P/E ratio of 7.1, and offers a yield of 4.7%. Based on a conservative growth estimate of 3.5%, my fair value range is $110 - $160 for the company. Thus, the stock has significant upside potential.
Gold Corp recently announced a 32% increase in its annual dividends. The company, which is the only gold producer paying monthly dividends, has been paying dividends for the last 10 years. However, Fidelity reduced its holdings by 22% in the last quarter. The investment titan still has a 7.62% stake in the company.
Incorporated in 1994, Goldcorp became one of the world’s largest gold producers in just two decades. Goldcorp has 16 major operations and development projects around the world. It operates several gold mines in Canada, Mexico, the United States and Argentina. I am not a big fan of precious metals, and I believe we are having a serious bubble in these commodities. However, Goldcorp is one of the few stocks with a safety of margin. I still would not buy it, but holding should do okay.
AT & T was another stock Fidelity reduced its stake. While the investment titan still owns 34.37 million shares, it reduced its holdings by 41.46% in the last quarter.
AT&T, a dividend pick for the next 5 years, offers a safe yield of 5.9%, supported by a relatively high payout ratio of 87%. However, the company has enough cash to provide the dividend payment. The biggest impact on the stock’s 2011 performance was the T-Mobile deal. Federal Communications Commission report on the deal was not welcome by the AT&T’s management. FCC claimed that the proposed merger deal would limit the competition in the industry. The proposed deal will probably be significantly modified in order to be approved by the anti-trust committee. However, whether the deal is approved or not, I think AT&T is fairly-valued. Based on a pretty conservative EPS growth estimate of 3.5%, my fair value range for AT&T is $25 - $45. Oppenheimer’s target price of $35 fits perfectly within this range.
Big Buys
Fidelity increased its stake in Microsoft by 56% in the last quarter. Apparently, Microsoft became too cheap to be ignored by the Fidelity’s fund managers. The stock has been underperformer in 2011 so far, providing negative returns. Maybe 2012 would be a better year for Microsoft.
Microsoft is trading at a cheap trailing P/E ratio of 9.33, and a lower forward P/E ratio of 8.44. It pays a yield of 3.12%. Analysts estimate 10% EPS growth for the next 5 years, which is conservative, given the company’s past earnings growth record. So, why Microsoft is so cheap? I think the primary reason for Microsoft’s underperformance is the massive amount of share dilution by the insiders. Bill Gates, himself, sold out near 80 million shares so far in 2011. As long as, he keeps selling these stocks under the automated sell program, the stock will be kept under significant pressure.
Franco Nevada is a gold-focused royalty with additional interests in other commodities. Fidelity opened a new stake on the company in the last quarter. Although Fidelity invested only 0.17% of its portfolio on Franco Nevada, total share ownership is 14.17%. Thus, Fidelity is the largest shareholder of the company.
Franco has been in an upward momentum for a long time. Since its dip of $10 in 2009, the stock increased by 4-fold, reaching a value of above $40 by 2011. It has also been an outperformer, returning 24% in this year. Besides Fidelity, Murray Stahl and Jean-Marie Eveillard are pretty bullish on the stock. Investors should also watch for the Blackrock’s portfolio, since investment giant also has a 7% stake in the company.
Disclosure: I am long AAPL.
