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Fidelity® Growth Company Fund

  • Symbol: FDGRX
  • No Transaction Fee No Transaction Fee 1
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Fidelity® Growth Company Fund: Quarterly Fund Review
MARCH 31, 2016
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Performance Review

The fund's share classes underperformed the slight gain of the benchmark Russell 3000® Growth Index for the three months ending March 31, 2015. Versus the Russell index, picks in the health care sector's pharmaceuticals, biotechnology & life sciences group were by far the biggest drag on results.

In the pharma and biotech categories, we seek companies selling breakthrough drugs, such as firms that specialize in treating unmet medical needs and fatal diseases or in areas where existing therapies have some shortcomings. We also look for firms with a strong product pipeline that we think should help support long-term growth potential. Unfortunately for the fund, the industry was hurt this quarter by a sharp pullback in January and investors' concerns surrounding drug pricing.

Most of the fund's largest individual detractors came from the group, including Alkermes, which produces drugs to treat diseases of the central nervous system. The stock plunged 44% in a single day in January after the firm announced disappointing preliminary top-line results from the first two of its three phase III studies on its lead drug to treat depression, and it never recovered. The stock returned -57% for the full quarter.

Other industry laggards for the fund included Regeneron Pharmaceuticals, one of our largest fund holdings, and Ionis Pharmaceuticals. Each stock lost just over a third of its value. Despite the poor quarterly performance of the three stocks mentioned, we remained confident in each firm's products and growth prospects, and we held on to our stakes.

Another source of underperformance for the fund was the software & services segment of information technology; software & services holdings made up a quarter of the fund's assets. Here, the fund's large and longtime holdings in salesforce.com detracted. The stock fell in January when cloud-computing peer Tableau Software announced a drab first-quarter outlook for fiscal-year 2016, making investors wary of the entire industry. Shares of salesforce.com began to recover in February after the firm reported a strong outlook for fiscal-year 2017 and fourth-quarter revenue that came in above estimates. However, this upswing could not offset the early-quarter loss, and the stock returned -6% for the three-month period. We remained bullish on the stock because of the firm's continued revenue growth and some promising successes outside of its core business of salesforce automation – such as service and marketing.

Turning to positives, yoga-inspired athletic clothing retailer lululemon athletica – another large fund holding – rated the quarter's top individual contributor. The stock rose 29% for the period. Shares spiked in late March after the company announced surprisingly strong fourth-quarter financial results, including solid sales during the holidays – a critical period for retailers. Comparable-store sales also showed growth, driven primarily by strong online sales, which account for 21% of the firm's revenue.

Also contributing was NVIDIA, an out-of-index semiconductor company that has done well in the visual-computing field and shown leadership in the "machine learning" arena, including driverless cars. We liked the firm's diversified business, and we remained optimistic about its long-term growth prospects. The stock began to rise when NVIDIA announced record fourth-quarter earnings in February, primarily attributable to strength in its gaming, cloud and automotive platforms. The company also provided solid first-quarter guidance. The stock posted a 9% gain for the period.

LARGEST CONTRIBUTORS VS. BENCHMARK
Holding Market Segment Average Relative Weight Relative Contribution (basis points)*
lululemon athletica, Inc. Consumer Discretionary 1.47% 33
NVIDIA Corp. Information Technology 3.13% 27
Kate Spade & Co. Consumer Discretionary 0.39% 14
adidas AG Consumer Discretionary 0.70% 11
Eli Lilly & Co. Health Care -0.69% 10
* 1 basis point = 0.01%.
LARGEST DETRACTORS VS. BENCHMARK
Holding Market Segment Average Relative Weight Relative Contribution (basis points)*
Alkermes PLC Health Care 1.09% -110
Regeneron Pharmaceuticals, Inc. Health Care 1.51% -61
Ionis Pharmaceuticals, Inc. Health Care 0.90% -42
Alnylam Pharmaceuticals, Inc. Health Care 0.89% -38
Salesforce.com, Inc. Information Technology 3.94% -24
* 1 basis point = 0.01%.

Outlook and Positioning

Looking around the market at quarter end, we remain optimistic, as we still see potential opportunity among firms we believe are showing progress toward growth, regardless of conditional macro factors. Also, we've been giving close examination to the fund's current holdings, taking a realistic approach to analyzing the prospects of each individual company. We'll continue to prune stocks of those firms whose business prospects have not blossomed against a good economic backdrop, since we believe they are less likely to flourish when the economy slows.

Three sectors continued to make up roughly three-quarters of the portfolio during the fourth quarter: information technology, health care and consumer discretionary. Despite its large allocation, the fund's consumer discretionary weighting still registers below benchmark. A big portion of the underweighting was in traditional media, as we preferred to invest in newer-media names, Internet leaders that happen to be classified in the technology sector.

We believe newer-media companies provide better-targeted ads and are growing much faster than traditional media. Specific to the consumer discretionary sector, major fund holdings included restaurants that we thought have unit sales growth in front of them, hospitality companies with international growth prospects, focused omni-channel retailers and leaders in online retail.

Within tech, we continue to be interested in what we consider "best in class" paid-search and social-media companies that provide attractive services, can grow their usage and deliver their advertisements in a targeted way. To that end, Facebook, Amazon and Alphabet were among the fund's largest holdings. Facebook also was among our biggest relative contributors, while Amazon detracted. Each of these firms has made strides to enhance core offerings and/or has produced a disruptive technology that became a catalyst for growth. Social-media giant Facebook continued to grow its core business, partly by enhancing its messaging and video capabilities. In addition, Facebook began to monetize Instagram – its online mobile photo and video sharing application – and unveiled its Oculus Rift headset with virtual-reality capabilities.

Meanwhile, e-commerce stalwart Amazon has leveraged its distribution centers to enhance and expand its goods business. Additionally, its cloud-computing arm, Amazon Web Services, has proved extremely profitable.

We remain bullish on search giant Alphabet's mobile transition and the creation of a new operating structure to highlight its investments. The firm has also showed better cost management.

While the future remains uncertain, we're optimistic that the continued good execution of these firms should result in continued growth.

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Morningstar Category: Large Growth
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