Search for positive change drives Fidelity manager's stock picks

Mark Schmehl pays little heed to traditional valuation measures.

Jade Hemeon 8 February, 2018 | 6:00PM
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Mark Schmehl, portfolio manager at Fidelity Investments in Toronto, has a voracious appetite for excitement that is stimulated by fast-moving stock markets.

In seeking holdings for the three funds he manages -- Fidelity Canadian Growth Company, Fidelity Special Situations and Fidelity Global Innovators Class -- he is constantly on the hunt for companies riding a wave of positive change.

These companies could be based anywhere in the world, operate in any business and be of any size. They could be former losers coming off the bottom or high-flyers with more room to soar, but the common element is forward movement.

Schmehl's ability to spot multiple threads of change in the rapidly evolving business world, discern where they are leading and pounce early on participating companies has been the cornerstone of his investment strategy and the reason for his historical outperformance relative to peers and market indexes.

"Change creates opportunity, and I gravitate to where change is happening," says Schmehl, 46. "I'm looking for situations that are getting better. Even a company that is at the bottom -- but getting less awful -- is getting better."

Schmehl's longest-managed fund, which he calls his "first baby and favourite," is the $2-billion Fidelity Special Situations. Under his leadership since 2007, it has a 5-star Morningstar rating in the Canadian Focused Small/Mid Cap Equity category.

Schmehl says change can sometimes occur simultaneously on a variety of fronts, in such diverse areas as corporate management, profitability, cash flow, politics, market sentiment and technology. "The more areas where change is occurring, the more powerful it can be."

He tends to find most of his ideas in the extreme edges of the market, or the two "tails." These include poorly performing companies coming to life or top performers gathering more steam. He isn't interested in playing in the middle of the fairway, and avoids stable, reliable blue chips. He likes the thrill of a constant flow of fresh ideas.

"The companies with the most upside potential and that are experiencing the most change tend to be the most innovative and are often speculative," he says.

To reduce risk, Schmehl assembles a widely diversified portfolio, currently holding more than 130 stocks. Movement in one holding can offset that of another, tempering overall volatility, he says.

Another defining feature of Schmehl's approach is his lack of regard for traditional valuation yardsticks such as price/earnings ratios. While the classic approach for many portfolio managers is to cut back on positions when they become expensive and seek other possibilities with lower valuations, he says that's a recipe for missing gains. He doesn't believe in selling just to take a profit.

"I don't try to call the top. You need to be willing to hang on and ride a stock over the cliff to sell well. Otherwise you sell too soon. A stock can be trading at ridiculous multiples -- the valuation may have gone bananas -- but I'll continue to own it if it's a good story."

When change starts to move in a negative direction, that's Schmehl's cue to get out. "I don't sit on losers, and if I make a mistake I sell right away. What gets me out is when the direction of change starts to shift, a company that may have been awesome is now merely good."

Currently, Schmehl's biggest weightings are in information technology at 40%, followed by materials at 19%, consumer discretionary at 15% and health care at 8%. He doesn't worry if his fund is heavily tilted toward any one sector, but mitigates risk by keeping his exposure in any one company to less than 5%.

Among his top holdings are  First Quantum Minerals Ltd. (FM) and Hudbay Minerals Inc. (HBM), base-metals producers that he owns due to his positive view on copper. For Schmehl, copper is a play on the shift toward electrically powered vehicles. Rather than trying to pick the most successful electric-car producer, he is investing in the material that goes into the wiring.

In the information-technology sector, he is keen on "disruptors" that are benefitting from the trend to online retailing and the mobile-payment space, including  Square Inc. (SQ, Shopify Inc. (SHOP) and  PayPal Holdings Inc. (PYPL), which are all in his top 10 holdings. In the tech sector he also likes  Take-Two Interactive Software Inc. (TTWO), a video-game provider, and  Microsoft Corp. (MSFT), a "core holding" which will continue to benefit from cloud technology.

In the traditional retailing area, where people still go to an actual store to buy merchandise, he holds Dollarama Inc. (DOL), a discount retailer that has been a market darling for the past couple of years and which he says offers the kind of merchandise people do not buy online.

Schmehl is optimistic about blockchain and associated technologies. For example, he owns BTL Group Ltd. (BTL), which is involved in the development of software for businesses to connect to blockchain.

He believes that holding a smattering of private companies enhances performance, giving the fund access to new innovations before companies become widely recognized and pricier. Among his private companies is Coinsquare Ltd., which has developed a platform for trading digital currencies like bitcoin.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Block Inc Class A66.89 USD-1.99Rating
Dollarama Inc131.81 CAD1.79
First Quantum Minerals Ltd16.34 CAD-0.85
Hudbay Minerals Inc11.14 CAD0.09
Microsoft Corp444.85 USD0.43Rating
North Peak Resources Ltd1.01 CAD2.02
PayPal Holdings Inc59.71 USD-1.74Rating
Shopify Inc Registered Shs -A- Subord Vtg86.37 CAD0.13Rating
Take-Two Interactive Software Inc151.71 USD0.84Rating

About Author

Jade Hemeon

Jade Hemeon  A Toronto-based freelance financial journalist with more than 20 years experience, Jade has previously been a staff reporter for the Financial Post and Toronto Star.

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