Fidelity's Top Holdings Reveal Bullish Surprises

If the favorite stocks of Fidelity -- the nation's largest mutual fund company -- are any barometer, it's not bargain-hunting time in the markets.

A list of the Boston behemoth's top holdings is chock full of pricey, fast-growing companies and is light on value stocks -- those companies that typically have slower earnings growth and more modest price tags.

The quarterly list shows that Fidelity's top holdings as of June 30 are Cisco (CSCO Quote), Intel (INTC Quote) and General Electric (GE Quote). Fidelity is the largest institutional shareholder in Cisco and Intel, and the third-largest in GE.

"To me this list signals that they're not expecting a big value comeback," says Scott Cooley, a senior analyst at Morningstar.

Indeed, among the firm's 15 biggest holdings, the average price-to-earnings ratio is 64.3, compared with 27.1 for the S&P 500 index. It's also higher than the 60.6 average for the top-15 stocks in the S&P 500, according to Baseline. That means Fidelity is, in general, willing to pay higher prices for stocks with growing earnings, a bullish stance.

If the firm's top-15 holdings were a mutual fund, it would be up 30.4% this year, compared with 7.1% for the average stock fund, according to Lipper.

Fidelity Fifteen Fidelity's top-15 holdings at June's end, compared with where they ranked among the firm's top 50 in March. The shop is the largest shareholder in 11 of the companies.
Pick	June 30 Rank	March 31 Rank	Second-Quarter Share Change
Cisco Systems	1	1	+
Intel	2	4	+
General Electric	3	2	-
ExxonMobil	4	5	+
Eli Lilly	5	6	+
Microsoft	6	3	-
Pfizer	7	--	+
Texas Instruments	8	7	-
Citigroup	9	8	-
Nortel Networks	10	--	+
Viacom Class B	11	36	+
EMC	12	9	-
Fannie Mae	13	10	+
Micron Technology	14	16	+
American International Group	15	11	-
Source: bigdough.com.

With a whopping $597 billion of investors' money invested in the stock market, Fidelity is a quiet giant. The firm's managers and analysts are preternaturally mum about stocks, fearing rogue traders will anticipate the firm's entrances and exits from titanic positions, reducing the fund shop's returns. But every quarter, fund companies have to file reports telling regulators their firm-wide holdings, and their most recent reports give the public a peek at where they saw opportunities and traps at the end of June.

For Fidelity shareholders, this snapshot gives an idea of where the firm's large-cap managers are investing your money. For stock investors, this shows where one of the biggest and most influential investment houses is placing its bets.

"When arguably the best stock pickers in the fund industry make a bet for or against a stock, it's good to pay attention," Cooley says.

And keep in mind, the firm can't dump these stocks in a hurry. Fidelity is among the three biggest institutional shareholders in all of its top-15 holdings, and in all but four, Fido is the largest institutional shareholder, according to bigdough.com.

There might be no better example of the shop's growth-stock appetite than its top holding, networking dynamo Cisco, which trades for a stunning 116 times its trailing annual earnings. Of course, most shops, including Janus, have Cisco among their top holdings. Not owning Cisco these days is a huge bet against the company because it is a big part of the indices and stock funds that Fido's funds are measured against.

The same could be said for the likes of Intel, GE and ExxonMobil (XOM Quote). Each is a big player in the benchmarks like the S&P 500, so while we can say the shop likes the stocks, it's tougher to say how deep its affection goes.

But the list is more revealing when it turns up the likes of mortgage lender Fannie Mae(FNM Quote) and cable TV giant Viacom(VIA.B Quote), as well as semiconductor shops Texas Instruments(TXN Quote) and Micron Technology (MU Quote). Fidelity's stock pickers have made outsized bets on these companies, none of which cracked the top 25 in the S&P 500. In the second quarter, Fidelity bought more shares of each of the stocks, except Texas Instruments, where the firm sold 2 million shares of the more than 130 million it owned.

It's also interesting to see drug maker Eli Lilly (LLY Quote) high on the list. This stock also isn't in the S&P 500's top 25. Though the company's stock price is still up for the year, it has tanked hard recently -- since losing a patent court case that allows a generic drug shop to start selling a knockoff of its popular and lucrative antidepressant Prozac next February.

Fidelity bought more than 7 million Lilly shares in the second quarter, bringing its total stake to more than 100 million shares, or nearly 9% of the company, on June 30. It's hard to imagine that Fidelity wasn't hit hard by Lilly's recent selloff.

If there's a stock on the list that looks as if it's falling from favor, it's software titan Microsoft (MSFT Quote). Just a year ago the stock was the anchor of nearly every growth fund, but its long-running antitrust spat with the Justice Department has made investors skittish. So far this year it's down 39.2%, far and away the biggest loser among Fido's faves.

In the second quarter alone Fidelity sold more than 66 million Microsoft shares, but is still the second-largest institutional shareholder with more than 118 million shares left. The fact that Fidelity and Janus, where many of the industry's top growth gurus roam the halls, are dumping Microsoft shares strongly indicates that the stock might not go north any time soon.

The absence from the list of biggies of IBM (IBM Quote), Lucent Technologies (LU Quote) and Oracle (ORCL Quote) indicates Fidelity isn't excited about those names either. The trio were in the top 15 of the S&P 500 but rank just 28th, 24th and 20th, respectively, on Fido's list.

Finally, this list proves big fund shops aren't all alike. Observers often say big money managers simply follow each other around the market, each staying so close to their benchmarks and competitors that they're essentially running closet index funds. But comparing Fido's top picks on June 30 with Janus' top holdings uncovers remarkably little overlap. The two shops' top-10 picks only have three stocks in common -- Cisco, GE, and Texas Instruments.