PM Discussion with Fidelity's Mark Schmehl

September 10, 2020 | Vito Finucci


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Mark manages a little bit of almost every portfolio we have through his Fidelity Canadian Growth Company and Fidelity Global Innovators mandates.

RBC Finucci Janitis Group RBC DS London

Today our group had a call with one of our submanagers, Fidelity's Mark Schmehl. Here are the notes from the meeting:

Thoughts on recent correction

  • Mark believes the recent sell-off was in large part due to Softbank ‘jamming into the market’ with millions of options
  • Similar thoughts on the previous rally being driven by Robinhood investors
  • None of the themes have changed, so there is no reason for valuations to change
  • Believes we may see a correction in time rather than price
    • Choppy sideways pattern for a while as we digest the ‘euphoria’


Virus stocks vs a new secular shift

  • One of the big questions investors are asking now is when do you leave the work-from-home stocks?
    • I.e. when do you sell Zoom and buy cruise lines
  • The virus can be viewed as cyclical - it will go away; BUT it has created a new way of working that will be with us forever
  • As a company you need to enable ALL of your employees to work from home at least some of the time rather than just ~10% pre-pandemic
    • Organizational priorities have changed
  • Maybe Zoom isn’t a virus stock, maybe it is a new world work-from-home stock; maybe you should be buying more Zoom
    • Zoom was up 40% last Monday and Mark believes this is the market saying wake up, this is not a virus stock, this is a secular change
    • Mark has done nothing with his Zoom position
  • Peloton is another good example - fewer people are going to want to go back to a big sweaty gym, this is not necessarily a virus stock
  • However, there are virus stocks that Mark believes can be traded
  • Eventually people ‘cocooning’ at home will stop
    • Maybe you’ll be making less Nespresso’s, less home decorating, less renovations


Current ideas

  • Trying to find strong secular trends that are going to last beyond this year
  • Technologies that are transformative (ex. Zoom)
  • Health care is of interest on a stock specific basis
  • There are some industrial technology names that he’s very interested in


Technology bubble?

  • Most of the businesses that are being massively bid are great businesses, this is not the early 2000’s where the .com stocks had 0 revenue
  • Example is Shopify - they keep executing, growing like crazy quarter after quarter, making money, making the world a better place, why shouldn’t it trade at a high valuation?
  • Mark does think the Robinhood investors are here to stay, and are bidding these valuations higher


US election

  • Thinks this will be ‘the biggest non-event in history’ and is comparing it to Y2K
  • Market says Biden is going to win, you can see that in the ESG stocks
  • Typically markets want a Republican administration but now, it seems like it’s the opposite


ESG (Environment, Social and Governance) aka Responsible Investing

  • Governments have been moving in this direction for a while
  • Mark thinks only now is there a consumer realization that the world is getting hot
    • The fires in Australia, California is burning, water levels are higher - people are seeing this now for themselves
    • Europe is way ahead of North America in this realization
  • The hard part of ESG investing is 2 fold:
    • There aren’t a ton of ESG stocks to buy
    • Big industrial problems take time to fix and therefore the ESG stocks don’t grow as fast
  • Thinks that government dollars are going to come in like a tidal wave
  • Since there aren’t many stocks to buy, Mark thinks the few that there are will do very well


‘Reopening’ stocks

  • Dipping your toe is a good way to do it, that’s what Mark’s practice has been
  • “When this is over we’re going to have the biggest party you’ve ever seen”
    • People will travel, spend money, throw parties
    • Compared it to the roaring 20’s
  • BUT the market is telling you this isn’t going to happen soon
  • People are very fearful about the election and a 2nd wave - hard to get them excited
  • Mark does not think there will be a 2nd wave in the devastating way people expect and doesn’t think the election is going to be as big as people think


Gold & commodities

  • Still likes gold
  • The only way we can pay off this massive pandemic-created debt is to inflate our way out; gold wins out of that environment
  • Not interested in other commodities at this time


Clarity & market/company management insight

  • There is more clarity now than in March, which makes the job harder
  • Everyone’s in limbo; ‘wait and see’ for a vaccine - company management, consumers, policy makers
  • Trying to find stock ideas unrelated to the virus or election that will do well on their own


Mergers and Acquisitions (M&A) activity

  • Does not think you’re going to see much M&A in software stocks
    • Valuations are too high, even with the recent pullback
  • If you do see larger companies like Microsoft taking out some software companies at crazy prices, maybe this means you’re close to a top

 

Initial Public Offering (IPO) market

  • Everyone wants to IPO right now - the market is hot
  • Some bad stocks have IPO’d and doing quite well
  • Feels that the market is bubbling but can continue to bubble here for a long time
    • With unlimited stimulus the market can keep chugging along


Please let us know if you have any questions or need anything else.

All the best,

Vito and Eric

 

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