When it comes to crystal-balling the best mutual funds of 2021, start with the winners for 2020. That’s got to include the $3.04 billion Fidelity Trend Fund (FTRNX), run by Shilpa Marda Mehra.
Mehra’s Trend was one of Fidelity’s top-performing U.S. diversified stock funds in 2020. Any investor — whether in individual stocks, ETFs or mutual funds — stands to benefit from knowing what Mehra expects on Wall Street in 2021.
The crux of her outlook: A lot of stocks that were beaten down in 2020 should rebound big time in 2021.
Best Mutual Funds 2021: Help From Marquee Stocks
She detailed her reasoning — which types of stocks, and why they’re due to bounce back — in an in-depth conversation with Investor’s Business Daily.
She also spelled out her theses for marquee-name stocks that helped drive her fund in 2020.
Those names include some of 2020’s biggest winners on Wall Street, including chipmaker Nvidia (NVDA), cloud-based workflow management software specialist ServiceNow (NOW), online creative tool titan Adobe (ADBE), battery and electric-car maker Tesla (TSLA) and apparel maker Nike (NKE).
On Track To Be One Of The Best Mutual Funds For 2021
Trend Fund’s 2020 record was rock solid. Going into Dec. 30, Trend was up 46.40% for the year vs. 17.46% for the S&P 500 and 35.07% for its large-cap growth rivals tracked by Morningstar Direct. That put it in front of 84% of its peer group.
Trend is a 2020 IBD Best Mutual Funds Award winner. It won that distinction by topping the S&P 500 in calendar 2019 as well as over the three, five and 10 years ended Dec. 31.
Its pace this year would make it a Best Mutual Funds Award repeat winner in 2021.
Mehra has run Trend since August 2018. Prior to taking its helm, she was an analyst who rated stocks and covered segments of the financial sector. Early in her career, she tracked the generic-drug industry.
Mehra, who is 40 years old, spoke with IBD from an office in her Boston home.
What Shilpa Marda Mehra Seeks In Stocks
IBD: Shilpa, what do you look for in stocks?
Shilpa Marda Mehra: I look for companies with durable competitive moats and profiles. When I’m thinking about investment themes and trends, I think about durability over the next five to 10 years.
Many stocks are at premium valuations. So thinking about sustainability over a very long time helps de-risk the stock’s multiple to some extent.
I look for durability of secular growth trends and competitive moats.
IBD: You also own a smaller group of stocks that are less proven, right?
Mehra: Yes, I have a smaller basket of stocks with a large emerging-market opportunity ahead of them. Those companies are structurally improving, and the market doesn’t yet fully grasp the implications.
What Makes A Stock Durable: Companies With Vital Products
IBD: A stock’s durability often comes from selling some mission-critical product, correct?
Mehra: Yes. And themes are also very important. I spend a lot of time trying to understand why competitors will not be able to disrupt an industry and overtake an existing leader. Competition over the long term is what can make or break a business.
2021 Market Outlook By Manager Of One The Best Mutual Funds
IBD: I know you invest bottom-up rather than based on top-down macro trends. But with your keen understanding of the market, I’d like to know what your market outlook is for 2021.
Mehra: I’m very focused on owning durable growers with big competitive moats. But incrementally there’s some opportunity at the intersection of durable growth and attractive valuations. Those are industries impacted by the coronavirus pandemic.
Now that we have visibility to a vaccine, it appears we may be able to resume normal life if not in 2021 then maybe 2022. As we return to normal, that could unleash a lot of demand from consumers, who have saved up a lot of money.
They haven’t gone to restaurants, traveled, gone out. So some sectors that look interesting are in the travel area, travel services, that whole travel ecosystem. Leisure, restaurants, live events look interesting. There are a number of durable companies that were severely impacted, where I’m looking for companies that match my criteria.
IBD: You’re looking for bargains?
Mehra: My philosophy is durable growth. But you have to be opportunistic, find mispriced companies and assets. We’ve gone through a lot this year. But I’m optimistic that hard-hit areas can recover.
GPUs Provide Nvidia’s Moat
IBD: Let’s talk about some of your durable growers. Am I right in thinking that chipmaker Nvidia’s moat is mainly due to the graphics processing units it produces? GPUs are better than ordinary central processing units (CPUs) at performing fast math. These are essential for things like video games, computer graphics, autonomous driving, cryptocurrency mining, machine learning and artificial intelligence (AI)?
Mehra: Nvidia has leadership in several of those areas. But competitors have seen how successful Nvidia has been and are trying to get in there.
IBD: Nvidia also has a popular software development platform, giving developers access to libraries of operating code for developing new apps, right?
Mehra: The combination of that and its GPUs creates a very strong competitive moat around Nvidia.
Why One Of The Best Mutual Funds Likes ServiceNow
IBD: ServiceNow started by supporting customers’ IT departments. They’ve expanded into support for other departments, like human resources and facilities management. Is that what makes them a dominant software-as-a-service (SaaS) player?
Mehra: Yes. Clearly SaaS over the last several years has become critical for businesses. The work-from-home dynamic imposed by the pandemic highlighted the importance of being strong digitally..
And ServiceNow is a dominant player in the enterprise digital transformation, whose pace accelerated during the pandemic.
Every time they expand into a new enterprise department, they’re showing potential for another TAM (total addressable market).
And once a company selects a SaaS provider for their digital transformation, it is sticky. That provider becomes embedded into their systems.
Still, competitors try to imitate them, but not on a similar path. So the competition is something we’ll need to watch.
How Adobe Helps One Of The Best Mutual Funds
IBD: Adobe’s creative tools are essential to people creating online marketing campaigns, aren’t they?
Mehra: Adobe has benefited from a lot of key secular trends.
Adobe has benefited from media going digital and marketing going digital. This is another sticky area. Once you train on a certain system, it’s hard to move to another. That’s part of Adobe’s competitive moat.
Tesla Reached A Sweet Spot
IBD: Earnings-per-share growth by Tesla has jumped. It was just 5% four quarters ago. The past three are 140%, 300% and 105%. Why the big bounce?
Mehra: They finally reached a crossover point. Early on, many emerging technology companies don’t make money. Then, as they get to a certain scale, their margins start to come through. That’s what’s happening with Tesla.
There’s a lot of demand for their vehicles. They got to that sweet spot where there’s not just revenue growth but earnings growth.
They still have low penetration, leaving them room to grow. But you have to watch for new competitors.
One Of The Best Mutual Funds Benefits From The Nike Digital Experience
IBD: Was the pandemic sales slowdown for Nike a temporary setback from which they’ll recover?
Mehra: Yes. Consumers did not know what would happen next. So buying a new pair of athletic shoes was a low priority for most people.
But Nike benefits from big long-term trends. People are dressing more casually. There’s more focus on being outdoors. People exercise. The whole “athleisure” apparel industry is doing well.
Nike in particular has had strong innovation. That’s what consumers want. They want cool workout clothes that are unique.
And Nike’s digital experience is something they’ve invested in. Now they have a leadership position. Consumers love shopping with Nike. They’ve made it easy to shop, compare prices, find the right sizes.
Has Chipotle Resolved Problems?
Mehra: They had issues that they’ve mostly resolved. But there is an inherent risk in this industry.
Now Chipotle is a good business with high returns and a really good value proposition. Consumers like their foods, which are affordable and fresh. Chipotle has combined that with a great digital experience. They’ve done innovative things on the digital side.
I order from them frequently. You can have a fairly seamless experience, ordering on your app, picking it up. You don’t have to have contact with anyone. The importance of that has been highlighted in the last several months.
Less-Proven Stocks Help Position Trend To Be One Of The Best Mutual Funds For 2021
IBD: Give me an example please of a stock in that small second basket of equities you own.
Mehra: Sure. Their path is something more uncertain than the traditional core basket of durable growers. But they’re companies with huge potential. The question you have to ask is, “Is there a value proposition that consumers really want? Are there competitors?”
One is Monolithic Power Systems (MPWR). It’s a small, niche semiconductor company. They have a pretty small share of the analog semiconductor market, about 2%.
An interesting thing about analog chips is that they have long product cycles, close to 10 years. So innovation on analog chips is limited.
But Monolithic has brought innovation to that market. They’ve done that by combining digital and analog capabilities. So their chips are small but very powerful.
Chips like this are used for a lot of things that we’ve seen growth in, such as cloud-based data centers, AI, robotics, battery management.
And their founder leads the company. I always like founder-led companies. It has a very strong culture behind it, a desire to succeed.
IBD: What are your main strengths as an investor?
Mehra: First, my ability to parse through a lot of information and figure out what’s important. You have to avoid getting lost in the details, news flow and random information.
Second, I have a long-term mindset and believe that duration is one of the key advantages I have as an investor.
Third, good judgement is another strength. My job centers around weighing pros and cons and assessing risk-reward in a balanced and unbiased way.
Finally, I love what I do.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and active mutual fund managers who consistently outperform the market.
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