Fidelity OTC Fund Pays Big for Fast-Growing Firms

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.