William Danoff, the manager of the $32.2 billion Fidelity Contrafund (FCNTX), calls himself a “good-news guy.”
He buys stocks based on news of large corporate stock buybacks, regulatory changes, initial offerings or mergers, he said. “I’m looking for good news like improved earnings growth potential, plus cost cutting or new management,” Danoff added from his office in Boston.
He said he is more focused on a company’s fundamental quality than on its current share price. “Over the long term,” he said, “the price is forgotten but quality remains.”
Earnings growth is important, he said. He buys shares of companies that he believes will generate average annual earnings growth of at least 15% to 17% over the next five to ten years.
In June, Fidelity Investments made permanent its waiver of the 3% front-end sales charge, or load, on Contrafund shares.
The fund, which can buy stocks of any market capitalization, is highly diversified, holding about 500 stocks. Over all, the average weighted market capitalization of the portfolio companies was $27.8 billion at the end of June; companies with market caps of less than $10 billion accounted for about 45% of assets.
Danoff works with about 120 analysts of domestic stocks and 100 analysts of overseas stocks to choose potential purchases. To find companies with the best earnings growth potential over the next five years they talk to company management and closely watch earnings reports.
Danoff also reviews per-share earnings growth rates over the last five to ten years, preferring companies with steadier growth. For cyclical companies, he aims to pinpoint where they are in the industry cycle.
Over all, he wants what he calls “best-of-breed companies” with strong competitive positions and management that capitalizes on opportunities for change. “We want them to tell us how they see the future and how they’re going to get there,” he said. “What drives the market? How do you position your products to capitalize on trends? What are you doing to grow the company?”
In his financial analysis, Danoff likes to see increasing sales or product prices, as well as improving profit margins. He also looks for climbing returns on equity, which typically reflect improvement in business operations, he said.
Danoff began buying shares of Ryanair Holdings ADS (RYAAY), the Irish discount airline, in June 1999. Danoff called Ryanair “a classic growth company” that has a good long-term record, and he said he expects annual earnings growth to average 25% to 30% over the next five years.