Fidelity OTC Fund Pays Big for Fast-Growing Firms

published 3 March 2014

Stocks have performed marvelously over the past year, notwithstanding the market’s slide in early 2014. But some have done better than others. Electric-car maker Tesla (symbol TSLA) surged nearly 400%, biotech firm Illumina (ILMN) tripled, and social-media darling Facebook (FB) doubled. They and other growth stocks helped Fidelity OTC (FOCPX) land in the top 1% of its category over the past year.

No one will mistake OTC’s manager, Gavin Baker, for a classic bargain hunter. While the overall stock market sells for 15 times forecasted 2014 earnings, Tesla trades at a kingly 110 times estimated earnings; Illumina and Facebook trade at the more princely levels of 70 and 50 times earnings, respectively. These are prices Baker is willing to pay for what he calls “companies that are defining the future.”

Baker doesn’t totally ignore price, though. Potential investments (he mostly trolls the Nasdaq Stock Market) must have strong earnings growth and strong share-price momentum or must trade at a price that’s inexpensive relative to a company’s earnings, sales or dividends. Momentum firmed the case for Tesla, for example, when Baker picked up its shares in 2010. Microsoft, by contrast, is a stock he owns because it’s cheap.

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After Baker buys, he sets price targets, but he doesn’t always sell a stock once it hits the goal. That’s because, he says, targets are not always useful when it comes to the fast-growing companies he owns. The fund has a turnover ratio of 116%, implying that Baker holds each stock for a bit less than a year, on average.

Tan joined Kiplinger in June 2012 from Bloomberg News, where she was a reporting intern covering mergers and acquisitions and IPOs in New York. Prior to that, she worked as a production intern at CNN in Washington, D.C., where she assisted with political research and live broadcasts. She also covered financial regulation, including the Dodd-Frank Act, as a reporter for the Medill News Service. Before that, she wrote about economics and commodities in Chicago. She has written for the New York Times, MarketWatch, Businessweek.com, United Press International and the San Francisco Chronicle. She holds a BBA in finance from the University of Michigan and an MS in journalism from Northwestern University.