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Fidelity® Growth Company Fund

  • Symbol: FDGRX
  • No Transaction Fee No Transaction Fee 1
  • Closed to new investors
Fidelity Growth Company Fund: Quarterly Fund Review
SEPTEMBER 30, 2015
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Investment Approach

  • Fidelity® Growth Company Fund invests across a spectrum of companies, from blue chip to aggressive growth.
  • Our investment approach is anchored by the philosophy that the market often underestimates the duration of a company's growth, particularly in cases where the resiliency and extensibility of the business model are underappreciated.
  • We focus on firms operating in well-positioned industries and niches that we believe are capable of delivering persistent sales and earnings growth.
  • This approach typically leads us to companies that we think have the potential to unlock shareholder value through either a growth-enhancing product cycle or an internal catalyst such as a turnaround or acquisition.
  • We believe it critical that companies fund their own growth - through the cash they generate - and benefit from management teams focused on creating long-term shareholder value.

Performance Review

The fund's share classes underperformed the benchmark Russell 3000® Growth Index for the three months ending September 30, 2015, against a negative market backdrop.

Unsuccessful stock selection weighed on the fund's relative performance this period, with our picks among health care names hurting most, followed by consumer staples. Industry positioning was a modest detractor the past three months.

Within health care, biotechnology stocks dominated the fund's biggest individual detractors. We look for firms with potential catalysts for change. In the pharmaceuticals and biotech category, that may translate into owning companies working on breakthrough drugs, such as firms that specialize in treating unmet medical needs or fatal diseases, or in areas where existing therapies have some shortcomings. We believe firms with a strong product pipeline should help support long-term growth.

Unfortunately, many of the names that lifted the fund's results last quarter from this category hurt results the past three months. In fact, our top three detractors all came from this segment: bluebird bio, Alnylam Pharmaceuticals and Isis Pharmaceuticals.

Each was hurt by a sharp pullback in the biotech industry due to a combination of profit taking after a strong five-year run, increasing macroeconomic concerns and fears about the cost of prescription drugs taking center stage among politicians.

Turning to consumer staples, our stake in Keurig Green Mountain also dragged on results. Keurig shares returned about -32% for the quarter, plummeting after the company reported weaker-than-expected sales for its home-brewing machines, lowered its earnings outlook and planned for about 330 job cuts. The company continued to face sales difficulties for its beverage systems. At period end, the firm introduced its anticipated cold-beverage machine, which retails for about $370 and competes with similar machines sold by SodaStream.

While the stock's performance proved a disappointment this period, we added a bit to the fund's stake in Keurig. On top of the growth prospects associated with adding cold beverages to its product lineup, we thought Keurig's continued partnership with soft drink giant Coca-Cola validated the strength of the firm's products and management team. Additionally, we're optimistic that its potential to expand internationally could create more growth opportunities in the future.

On the positive side, picks within information technology were a plus versus the benchmark. One of the fund's largest holdings was also its biggest individual contributor: chipmaker NVIDIA, a non-benchmark holding.

Shares of NVIDIA, which manufactures graphics processing units, rallied in August after the firm announced better-than-expected quarterly financial results. We liked the firm's products and remained optimistic about its long-term growth prospects, so we maintained a large position during the quarter.

We're interested in finding 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.

From this space, Google, another large fund holding, was a big plus. Its shares gained about 17% for the quarter, as the Internet search company continued to post double-digit top-line revenue growth, increased the amount of company information it disclosed under CFO Ruth Porat, and took steps to cut costs and prioritize its many projects. Google made plans this period to reorganize into a new holding company called Alphabet, under which its many tertiary business lines will be separated from its core Google online-advertising business. Google was among the fund's largest holdings the past three months.

Holding Market Segment Average Relative Weight Relative Contribution (basis points)*
NVIDIA Corp. Information Technology 2.03% 54
Google, Inc. Class A Information Technology 1.92% 31
Skechers U.S.A., Inc. Class A (sub. vtg.) Consumer Discretionary 1.04% 23
Amazon.com, Inc. Consumer Discretionary 1.13% 21
Salesforce.com, Inc. Information Technology 3.76% 20
* 1 basis point = 0.01%.
Holding Market Segment Average Relative Weight Relative Contribution (basis points)*
bluebird bio, Inc. Health Care 0.74% -38
Alnylam Pharmaceuticals, Inc. Health Care 1.28% -37
Isis Pharmaceuticals, Inc. Health Care 1.01% -26
lululemon athletica, Inc. Consumer Discretionary 1.30% -23
Keurig Green Mountain, Inc. Consumer Staples 0.66% -19
* 1 basis point = 0.01%.

Outlook and Positioning

Three sectors continued to make up roughly three-quarters of the portfolio during the third quarter: information technology, health care and consumer discretionary.

We've already described some of the fund's investments within health care and technology. As for consumer discretionary: Despite a large allocation, the fund maintained a below-benchmark weighting here.

A big portion of the underweighting was in the area of 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 firms. 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.

Geopolitical tension in the Middle East and slowing economic growth in China, along with several other macroeconomic factors, cast a foreboding shadow over the markets, in our view. Additionally, a slower-than-typical economic recovery has kept inflation in check, as has a boost from plunging oil prices.

One of our biggest challenges of late has been identifying stocks that fit the fund's investment criteria and that we think can grow faster than the market average over the next few years, regardless of macroeconomic forces.

When we look around the market at period end, we're still optimistic, as we still see potential opportunity among firms we believe are showing progress toward growth, regardless of conditional macroeconomic factors.

In addition, we've been closely examining the fund's holdings, taking a realistic approach to analyzing the prospects of each individual company.

With that in mind, we plan to continue to prune the stock of firms whose business prospects have not blossomed against a good economic backdrop, since they are less likely to flourish if the economy slows.

For example, we sold ViaSat from the fund before the start of the period because its consumer home-satellite broadband business has been slow to grow.

Instead, we'll look to invest more in firms currently achieving success or that we consider most likely to achieve success in the future.

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