I500: Fidelity Investments’ Dan Dupont

Portfolio manager, Fidelity Investments

 

Top picks from the pros

Dan Dupont

Portfolio manager, Fidelity Investments

Dan Dupont is a simple guy, or at least that’s how he describes himself. The Fidelity Investments portfolio manager isn’t big on splash—in both life and investing. His deep-value philosophy can be boiled down to four points: he’s looking for high-quality stocks that protect against the downside; he wants businesses where short-term issues have caused investors to abandon the company; he wants to wait until valuations are “out-of-this-world” cheap, and he tries not to pay attention to macro issues like eurozone debt or Chinese growth. The best buys are the ones that have strong fundamentals but have fallen out of favour. “If I believe the market is wrong about the quality of a company, I’ll get very interested,” he says. Dupont’s approach won him a Lipper Fund Award this year and helped his Fidelity Large Cap fund secure a five-star Morningstar rating and a 12.7% 10-year annualized return.

Dupont’s picks

1| Metro (TSX: MRU)

Market cap: $6.2 bil | P/E: 12.9

(Peter Power / The Globe and Mail)
(Peter Power / The Globe and Mail)

Dupont has owned this Montreal-based grocery chain for nearly five years. Why? Among his top reasons is the compounded 21% per year that it’s returned ever since Pierre Lessard, former CEO and president and now chairman of the board, took over the company in 1990. Dupont also likes its franchise model, because whatever capital is needed to open a new store is the franchisee’s responsibility. Metro gets a percentage of sales from every location, so it generates a lot of free cash flow, which it then returns to shareholders in the form of 1.53% yield and share buybacks. “It’s basically a royalty company,” says Dupont. Expect about 10% bottom-line growth.

2| Shoppers Drug Mart (TSX: SC)

Market cap: $9 bil | P/E: 15.1

A good reason to own this Toronto-based drugstore chain is that it’s a great demographics play. “People are getting older, and they’re willing to pay for medication,” says Dupont. He thinks the company will offer more paid services to older Canadians too. “Pharmacists are taking more of the overall health-care pie,” he says. Of course, Shoppers has got other things going for it, like being the most pervasive drugstore in the country. This was a great value buy a few years ago when provincial governments were pressuring the chain to lower generic drug prices. Its price-to-earnings multiple is higher today, but it’s still “a solid holding,” he says.

3| Open Text (TSX: OTC)

Market cap: $3.3 bil | P/E: 23.8

Waterloo, Ont.–based Open Text develops software that helps large companies organize data. It’s involved in numerous sectors, including automotive, education, health care and packaged goods. The main appeal here is that Open Text’s revenues are recurring. Customers pay for software and then incur a regular fee to use it. Right now its top-line growth is “anemic,” says Dupont; in Q2, revenues increased by 9.5% over the year before, which is much lower than the 20% year-over-year revenues it posted in 2012. Due to these issues, it’s trading at a 30% discount on an EV/EBITDA basis to its Canadian peers, but Dupont is confident its problems will be resolved.

Dupont’s Funds: Fidelity Canadian Large Cap Fund

10-year annualized return 12.8%

TOP 5 HOLDINGS

Shoppers Drug Mart: 6.9%

Loblaw: 5.1%

Vivendi: 4.9%

Fairfax Financial Holdings: 4.3%

BP: 4.0%

Fidelity Monthly Income Series

6.8% 5-year annualized return

$7.4 Billion Assets under management

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