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Fidelity® Growth Company Fund

  • Symbol: FDGRX
  • No Transaction Fee No Transaction Fee 1
  • Closed to new investors
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Fidelity Growth Company Fund: Quarterly Fund Review
JUNE 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

For the three months ending June 30, 2015, the fund outpaced its benchmark, the Russell 3000® Growth Index. Stock selection in pharmaceuticals, biotechnology & life sciences - the fund's second-largest industry allocation this period - was by far the biggest contributor to index-relative outperformance. Biotech names dominated the fund's list of top individual relative contributors. We look for firms with potential catalysts for change. In the pharma 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.

This period, top contributors from this industry that fit our investment thesis included Seattle Genetics, bluebird bio, Regeneron Pharmaceuticals and Alnylam Pharmaceuticals. Among them, Seattle Genetics rated the top spot. In April, the firm announced better-than-expected first-quarter financial results, along with raising 2015 guidance. Then in May the stock began to rally after Seattle Genetics' largest shareholder upped his stake in the firm.

The fund's biggest individual contributor was an overweighted stake in Skechers U.S.A., which makes footwear priced lower than brands such as Nike and Under Armour. A strong rise in sales and earnings the past quarter illustrated consumers' growing demand for casual/athletic footwear at a relatively lower price point. We liked Sketchers' inventory control, its solid execution and the potential for the firm to expand internationally.

Within information technology, we sought companies with what we saw as the potential to establish themselves as a new platform - such as SaaS (software-as-a-service) - which historically has tended to lead to favorable business models and strong profitability. Here, the fund's second-largest holding also was a big contributor: enterprise cloud-computing services provider Salesforce.com. In April, the stock hit a record high on reports the firm had hired financial advisers to field takeover inquiries.

On the negative side, the food, beverage & tobacco segment was a disappointment. The industry was largely weighed down by the fund's overweighting in Keurig Green Mountain. Keurig shares returned -31% for the period. The stock performed well last year, which helped the fund, but has had a tough run so far in 2015.

Keurig Green Mountain shares declined for the quarter, due to lower-than-expected revenue resulting from a double-digit sales slide for its home-brewing machines. The company announced downside earnings guidance for consecutive quarters. Keurig Green Mountain said it continued to face a difficult product transition for its Keurig 2.0 system for making hot beverages. The company hired a new chief technology officer during the period, and also named a new chief financial officer, who is set to take over in August.

While the stock's performance proved a disappointment this period, we added 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.

Stock picking in software & services was another drag on results. 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, the fund's overweighting in Twitter hurt. Twitter shares returned -28% for the quarter, hampered by disappointing first-quarter earnings and reduced revenue guidance for the messaging-service company's full year. First-quarter revenue rose 74%, although that was below even what the most pessimistic analysts had expected. Growth in the number of active Twitter members who use the service through mobile devices also disappointed.

LARGEST CONTRIBUTORS VS. BENCHMARK
Holding Market Segment Average Relative Weight Relative Contribution (basis points)*
Skechers U.S.A., Inc. Class A (sub. vtg.) Consumer Discretionary 0.71% 28
Seattle Genetics, Inc. Health Care 0.74% 24
bluebird bio, Inc. Health Care 0.76% 24
Regeneron Pharmaceuticals, Inc. Health Care 1.81% 22
Alnylam Pharmaceuticals, Inc. Health Care 1.35% 18
* 1 basis point = 0.01%.
LARGEST DETRACTORS VS. BENCHMARK
Holding Market Segment Average Relative Weight Relative Contribution (basis points)*
Keurig Green Mountain, Inc. Consumer Staples 0.87% -32
Kate Spade & Co. Consumer Discretionary 0.56% -24
Twitter, Inc. Information Technology 0.62% -22
United Continental Holdings, Inc. Industrials 0.60% -16
Cree, Inc. Information Technology 0.47% -15
* 1 basis point = 0.01%.

Outlook and Positioning

Three sectors continued to make up the bulk of the portfolio during the second quarter: information technology, health care and consumer discretionary.

We've already discussed 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; instead, we preferred to invest in newer-media names, Internet leaders that happen to be classified in the technology sector. We believe the 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, plus large and largely unmanageable debt in Greece and elsewhere, among other macroeconomic factors, all cast a foreboding shadow over the markets. Additionally, a slower-than-typical economic recovery has kept inflation in check, as has a boost from plunging oil prices.

As of June 30, we're six years into the economic recovery, and many of the fund's investments in various sectors and companies have continued to benefit from rising economic activity, such as higher capital expenditures and an increase in consumer spending. These positive factors have been a plus for the fund - and thus its performance versus the benchmark for the most recent quarter. However, we likely cannot rely on these economic tailwinds to propel stocks forward for the longer term. Therefore 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 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 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 just 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 those firms currently achieving success or that we consider most likely to achieve success in the future.

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Morningstar Category: Large Growth
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