The Fidelity Large Cap Stock Fund - Essay Example

Review of Fidelity Cap Stock Fund Stock Investment Analysis October 31, Introduction The Fidelity Large Cap Stock Fund (FLCSX) has 93.19% of its funds invested in companies registered in the United States (Fidelity 2012). The balance represents companies registered in the United Kingdom - 2.53%, Canada - 1.42%, Netherlands - 1.13%, and Germany -1.03% (Fidelity 2012). This is an indication that the fund is not very diversified with respect to currency since most of its investments are done in United States currency Performance The Fidelity Large Cap stock Fund has performed fairly well over the past year with a 17.68% cumulative total return as of October 30, 2012. When compared to the S&P 500 which contains the 500 top performing companies it has done much better by outperforming that fund by obtaining an approximate 3 percentage point higher return for the year to September 30, 2012. As at September 30, 2012 FLCSX also outperformed the S&P 500 Fund for the one month and three month cumulative total returns with returns of 3.75% compared with 2.58% and 8.83% compared with 6.35% respectively. However, the cumulative return for the six (6) month period to September 30, 2012 was not very different for both funds with the S&P gaining the advantage with a 3.43% return compared with a 3.29% return for FLCSX - a difference of 0.14% (Fidelity 2012). The key drivers of the fund are its investment in technology stocks such as Apple, Google and Microsoft; financial stocks such as JPMorgan Chase & Co and Wells Fargo & Co; and energy companies such as Exxon Mobil and Chevron. These are among its top ten holdings which include internet providers Comcast; General Electric which operates in the consumer and industrial goods market as well as energy, finance and technology industry; and Proctor & Gamble which operates in the consumer goods industry. These companies are high performance companies with Apple topping the list in its performance. Of the 208 stocks represented in the fund these ten (10) stocks account for approximately 29% of its holdings. Evaluation of volatility risks The fund is subject to volatility risks. The Fund’s beta is a measure of the fund’s systematic risk which stands at a value of 1.18. This beta value indicates that for one per cent (1%) changes in the return on the stock market the fund changes by 1.18% (Madura 2006, p. 295). The S&P index is normally used as a basis for determining the market return. The value of the fund’s beta suggests that when the market does well the fund does better and when the market experience negative returns the fund does worse in comparison. This is reflected in the cumulative returns for the year to October 30, 2012 where FLCSX showed a higher return of 34.21% compared to the S&P index which showed a return of 30.20%. The fund manager has performed fairly well so far but more can be done in terms of reducing the risk levels (as represented by beta values) for each of the stock in the Fund. Although, higher risks are said to bring higher rewards the stocks in the Fund should be so balanced that its beta value is less than or equal to one (1). I recommend that the Fund manager include more stock in the companies portfolio in order to further reduce the risk. Comparison of assessment of fund with Morningstar rating I agree with the triple star rating provided by Morningstar. While the firm has a blend of growth and value stocks it is not well diversified in terms of the countries in which the stocks are registered. With over 93% investments of its funds in stocks of companies registered in the United States (U.S.) there could be some major negative consequences for the value of the fund if there is a decline in the value of the US currency. Additionally, if there is any major fallout in the US economy the value of the fund will also be affected negatively. In terms of the mix of stocks it is widely diversified covering all the major industries except telecommunications. Some of the companies in the top ten holdings have seen negative growth in both revenue and earnings. Some of the stocks in the fund have shown returns on equity of over 20% while others range from 9% to 17% (Yahoo Finance 2012). Assessment of the funds top ten (10) holdings The FLCSX fund’s top ten holdings are from five distinct industries – technology, financial, energy, and consumer goods with one company - General Electric falling into most of these categories. There are some companies like Apple, Inc that have both high profitability and growth levels. They include Apple, Google and Microsoft which are in the technology industry. Other companies with favorable growth and earnings level include JPMorgan Chase Co. and Wells Fargo & Co. Energy stocks including Exxon Mobil and Chevron show declining revenue and earnings growth. However, an assessment of the figures for the last quarter compared with the same quarter in 2011 showed that Exxon Mobil faired much better than Chevron. Exxon Mobil stock is also less risky than the market and Chevron’s stock. General Electric’s stock has shown negative growth over the past 3 years (Morningstar 2012). The companies return on equity is also lower than most of the top ten investments. One of the companies that pose increased risk for the fund is General Electric which has higher debt/ equity ratio of 1.9 to 1. This suggests that there are high levels of debt which means the company’s shareholders are bearing a high level of risk. The company’s current ratio s 1.03 and this is very low. A favorable current ratio is 1.5 (BPP 2009). The company’s revenue is declining and its beta is much higher than the funds average at 1.43. The companies return on equity is also one of the lowest in the top ten. The company is currently trading at a price/earnings (P/E) ratio of 16.67 which is very high when compared to the other companies in the fund. As time goes by the P/E ratio is likely to fall substantially as the stock appears to be overvalued. It therefore means that it may be a very good time to sell as it currently represents a good buy for investors. Brigham and Ehrhardt (2005) indicates that the P/E ratio provides information on how much investors are willing to pay for every dollar of profits that a company reports in its financial statements. A company with a better return on equity (ROE) sells at a higher multiple than those with a lower ROE (Brigham and Ehrhardt 2005). It therefore implies that there are some contradictions in terms of what is happening in the market with GE stock. However, of the top ten holdings General Electric stock spans a lot of industries and therefore comparisons make more sense when they are done with companies operating in the same industry. Conclusion I recommend that General Electric be sold as soon as possible and replaced with more of another company’s stock. The stock chosen should be one that consistently outperforms the market and pays dividend regularly. Additionally, energy stocks such as Chevron and Exxon Mobil should be paid close attention as the revenues for these companies have been falling when compared to previous periods. Proctor & Gamble is another stock to watch closely as it too has experienced declining revenues for the past quarter when compared to the prior year (Yahoo Finance 2012). This company which operates in the consumer goods industry has current ratio of 0.97 and this suggests that it will experience problems in settling debts as they all due. It is very important that Fidelity analyze the key financial statistics for each of the stock in its Fund on a daily basis. The company should also pay close attention to other stocks relating to companies that are performing well so that it can effectively rearrange its portfolio of stock to ensure that the fund performs at the level that investors expect. The fund is dong well right now when compared with the S&P Index which is a benchmark against which funds are judged. However, the manager of the Fund has the ability to improve the Fund’s performance in the future. References BPP Learning Media Ltd. (2009) ACCA Paper F7-Financial Reporting. London, UK: BPP Learning Media Ltd Brigham, E.F and Ehrhardt, M.H. (2005). Financial Management: Theory and Practice. 11th ed. USA: Thomson South Western Fidelity Investments. (2012). Fidelity Large Cap Stock Fund (FLCSX). [Online] Retrieved from http://fundresearch.fidelity.com/mutual-funds/summary/315912402 [Accessed 31 October 2012] Madura, J. (2006). Financial Markets and Institutions. 7th ed. USA: Thomson South-Western Morningstar. (2012). Investment Research Center. [Online] Retrieved from http://library.morningstar.com/Default.html [Accessed 31 October 2012] Yahoo Finance. (2012). General Electric Company (GE). [Online] Retrieved from http://finance.yahoo.com/q?s=GE&ql=1. [Accessed 31 October 2012] Read More