Fidelity Leveraged Company Stock Fund

Transcription

1 Fidelity Leveraged Company Stock Fund Key Takeaways For the fiscal year ending July 31, 2017, the fund's Retail Class shares gained 17.45%, outpacing the 16.04% advance of the benchmark S&P 500 index but trailing the 17.95% result of the Credit Suisse Leveraged Equity Index. On September 14, 2016, Mark Notkin became Portfolio Manager of the fund, succeeding Tom Soviero, who, after 27 years at Fidelity, retired at the end of Upon taking over, Mark began to "reshape" the portfolio to materially diversify its top-heavy nature, lower concentration risk and reduce short-term volatility. Versus the benchmark, favorable security selection in the industrials sector included Air Canada, the fund's top individual relative contributor the past 12 months and a non-benchmark position Mark established in September. By sector, security selection in materials added the most value, led by corrugated-packaging company WestRock, as its shares benefited from the firm's strong earnings momentum. Conversely, the biggest relative detractor was Mark's decision to largely avoid personal electronics maker and benchmark stock Apple, based partly on his view that the fund's investments in firms that supply chips and other components to smartphone makers offered better potential upside. Looking ahead, Mark believes the fairly slow rate of economic growth experienced for much of the past year is likely to continue in the coming months. He remains optimistic about stock prices and opportunities for the fund. MARKET RECAP The U.S. equity bellwether S&P 500 index gained 16.04% for the year ending July 31, 2017, rising sharply following the November election and continuing to rally through the end of February on optimism for President Trump's pro-business agenda. Equity markets leveled off, however, as the fledgling administration faced the first test of its domestic agenda. Stocks reacted with uncertainty to efforts by Congress in March to repeal and replace the Affordable Care Act, and then reverted upward through July 31. Growth stocks surged ahead of value, while small-caps' advantage over largecaps narrowed. Sector-wise, financials (+36%) fared best, riding an uptick in bond yields and a surge in banks, particularly post-election. Information technology gained 29%, as a handful of major index constituents posted stellar returns. Industrials (+18%) was boosted by a call for increased infrastructure spending. Consumer discretionary (+14%) slightly lagged the broader market because brick-and-mortar retailers continued to suffer from increased online competition. Energy (0%) was hurt by low oil prices. Utilities (+6%), consumer staples (+4%), telecommunication services (-7%) and real estate (-2%) all struggled amid an improved backdrop for riskier assets that curbed demand for dividend-rich sectors, as well as the likelihood of further interest rate hikes later in Not FDIC Insured May Lose Value No Bank Guarantee

2 Q&A An interview with Portfolio Manager Mark Notkin Fund Facts Trading Symbol: Mark Notkin Portfolio Manager FLVCX Start Date: December 19, 2000 Size (in millions): $3, Investment Approach Fidelity Leveraged Company Stock Fund is a domestic equity strategy focused on investing in companies with a high level of outstanding debt, or leverage. We apply an opportunistic investment approach that allows the manager to move across the marketcapitalization and credit-quality spectrums, resulting in sector allocations that may differ significantly from the fund's benchmark. In particular, we seek companies with attractive valuations, strong competitive positioning and management teams that can prudently use free cash flow to grow shareholder value and reduce leverage over the intermediate term. We strive to uncover these companies through in-depth fundamental value and credit analysis of the entire capital structure, working in concert with Fidelity's high-income and global research teams, with the goal of producing favorable risk-adjusted returns over time. Q: Mark, how did the fund perform for the fiscal year ending July 31, 2017 The fund's Retail Class shares gained 17.45% the past 12 months, outpacing the 16.04% advance of the benchmark S&P 500 index but trailing the 17.95% result of the Credit Suisse Leveraged Equity Index. The fund handily topped its peer group average. Upon taking over in September 2016, my primary goal in reshaping the portfolio was to materially diversify its topheavy nature, lower concentration risk and reduce shortterm volatility. This resulted in several notable changes in portfolio construction, as I bought, sold and reconsidered positioning in a number of stocks based on my bottom-up investment process and view of the market. While my tenure on the fund is still relatively brief not quite a year I feel good about this repositioning, and I am pleased that performance versus the S&P 500 has been strong. Q: Did you make any notable changes after this initial reshaping effort Nothing major. It didn't take me long to get the portfolio where I wanted it, and its overall composition has remained pretty steady since. My move early on to diversify the fund's holdings partly was driven by my goal of identifying stocks that I believe offer strong risk-adjusted returns. Fundamentally, I look for companies with secular growth, competitive advantages, a concentrated industry structure, low capital intensity and solid management. Such firms often are characterized by high margins, a healthy return on capital and attractive free-cash-conversion ratios. I look for situations where I think growth is underpriced or risk has been overly discounted. Leveraged companies can be particularly susceptible to mispricing, and I believe our expertise in high yield is a key competitive advantage. Metrics I focus on include a low price/earnings-to-growth (PEG) multiple and high free-cash-flow yields. A key factor in looking at PEG ratios is conviction regarding the expected earnings growth and a good understanding of risk. An important factor in picking a stock based on high free-cash-flow yield is the sustainability of those cash flows. I generally favor the consumer discretionary and 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

3 information technology sectors, particularly semiconductorrelated names, because I believe our proprietary research gives us an advantage in these higher-volatility categories. Conversely, the fund is light on the consumer staples and utilities sectors, as well as commodities. Health care is the largest underweighting as of July 31, as I will describe later. Q: Any interesting new areas for investment I've added a handful of gaming stocks because I see favorable fundamentals and growth trends both domestically and abroad, particularly in China's Macau. Demand for casinos tends to be steady, which helps operators generate free cash, and there is very little new development. We view Macau as a huge, untapped market that has a long runway for growth. Fund holdings established this period include Melco Resorts & Entertainment and Las Vegas Sands, each of which has properties in Macau, as well as domestic operators Boyd Gaming and Eldorado Resorts. I added to an existing investment in Penn National Gaming. New fund holding MGM Resorts International operates facilities in Las Vegas and Macau. Each of these non-benchmark stocks modestly boosted our relative result the past 12 months. Q: What other decisions and securities helped Favorable security selection in the industrials sector included Air Canada, our top individual relative contributor and a non-benchmark position I established in September. Overall, I have a favorable view of airlines because I believe industry fundamentals are much improved after a wave of consolidation in recent years. The fund's sizable stake in Air Canada reflects my view that this airline is extremely well-run, faces less competition than others, has made some smart investments while also managing labor costs, and has some unique growth opportunities. I notably added to Air Canada since our initial purchase, placing it among the fund's largest holdings as of July 31. Security selection in the materials sector added the most value, led by corrugated-packaging company WestRock. The firm has produced strong earnings momentum since it was formed by the mid-2015 merger of packaging companies MeadWestvaco and Rock-Tenn. WestRock also has benefited from favorable supply and demand for containerboard. WestRock was a sizable position when I took over the fund. I significantly reduced our holdings as part of my reshaping of the portfolio, and eliminated it in April because I thought the stock had become fairly valued. Elsewhere, it helped to own Broadcom and Skyworks Solutions, two semiconductor firms serving the smartphone industry. I continue to view this as an area that is growing amid an ongoing shift to devices that require a broader array of bandwidth and, therefore, more-complex, higherpriced chips and other components. Broadcom has been able to buy durable franchises at reasonable prices and then make them better under the leadership of a wellregarded CEO. Skyworks is partly a play on the internet of things, a growing area that helps to diversity its primary business serving the smartphone industry. For these reasons, I have a favorable outlook for both Broadcom and Skyworks, our two largest holdings as of July 31. Q: What detracted Our biggest relative detractor was my decision to largely avoid personal electronics maker and benchmark stock Apple, which gained about 45% this period. This positioning was based partly on my view that the fund had sufficient and better exposure to the smartphone market via the semiconductor firms just noted, among others. I believe these suppliers stand to benefit not only from demand for smartphones, but also due to the increasingly sophisticated components they rely on. It hurt to hold a non-benchmark stake in Tenet Healthcare. The hospital operator was a sizable position when I took over, and I eliminated it last September based on the stock's valuation, pricing pressure on hospitals, and lackluster demand as a result of higher premiums and deductibles. Nonetheless, I bought it again in November because I thought the stock had become cheap and I was drawn to growth in Tenet's businesses such as surgery centers that provide care in a lower-cost setting. Lastly, weak security selection in energy primarily was a result of Southwestern Energy and Range Resources, two independent natural gas and oil companies. Shares of these highly indebted firms were hampered by lower costs for natural gas. I held on to both stocks and will be watching them closely in the coming months. Q: Mark, what is your outlook as of July 31 The macroeconomic picture has seen a slight downtick due to waning enthusiasm for economic stimulus via new legislation, particularly tax reform, which now seems like a tougher challenge. Still, there's no reason to think that the rate of economic growth we have seen, albeit low, will not continue in the coming months. Job growth has stabilized and interest rates remain extremely low, due to continued monetary easing by major central banks outside the United States, helping to make U.S. Treasuries look comparatively cheap. Valuations are up a bit but equity premiums are not excessive. So, in my view, the formula for steady growth in the stock market persists, so I remain optimistic. 3 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

4 10 LARGEST HOLDINGS Mark Notkin on the fund's investments in health care: "I've been actively reducing the fund's exposure to the health care sector, taking it from 17% of fund assets at the beginning of the reporting period to 6% by July 31. Pharmaceutical and biotech firms have been among my targets. My thesis is that, while the health care sector may look appealing based on aging demographics, providing coverage for our citizens is a huge component of the federal budget. With significant budget deficits and an enormous national debt, I believe Medicare and Medicaid rates will be under significant pressure. "Taking a closer look at pharma and biotech, I believe that the recent political firestorm related to price gouging by some so-called 'bad actors' has caused the entire category to begin to police itself. Even though there is yet to be any legislation behind the scrutiny, companies have begun to focus on this issue and attempt to get ahead of it by acting more rationally and responsibly. While this development is good for consumers and payers, it also means that healthy price increases enjoyed by drugmakers, long a key investment tenet, are likely a thing of the past. "Another factor is the Affordable Care Act (ACA). Although a so-called 'repeal and replace' appears less than likely, there is still some potential for the ACA to be replaced by a new plan that, based on almost all analysis I have seen, will cover fewer people. So the ACA tailwind of the past several years may become a headwind if Congress is able to pass new legislation. "Against this backdrop, I have eliminated or significantly reduced investments in a handful of pharma firms Merck, Alexion Pharmaceuticals, Valeant Pharmaceuticals International, PRA Health Sciences and Regeneron Pharmaceuticals. "Given that I see some considerable challenges ahead for health care firms, I plan to be more selective and have greater sensitivity to valuation as I look for rewarding investments here." Holding Broadcom Ltd. Skyworks Solutions, Inc. Facebook, Inc. Class A Alphabet, Inc. Class A Newell Brands, Inc. LyondellBasell Industries NV Class A Air Canada Bank of America Corp. Allergan PLC T-Mobile U.S., Inc. 10 Largest Holdings as a % of Net Assets Market Segment Information Technology Information Technology Information Technology Information Technology Consumer Discretionary Materials Industrials Financials Health Care Telecommunication Services 20.76% Total Number of Holdings 130 The 10 largest holdings are as of the end of the reporting period, and may not be representative of the fund's current or future investments. Holdings do not include money market investments. ASSET ALLOCATION Asset Class Portfolio Weight Portfolio Weight Six Months Ago Domestic Equities 84.21% 86.29% International Equities 12.48% 11.27% Developed Markets 9.90% 10.04% Emerging Markets 2.58% 1.23% Tax-Advantaged Domiciles 0.00% 0.00% Bonds 0.02% 0.68% Cash & Net Other Assets 3.29% 1.76% Net Other Assets can include fund receivables, fund payables, and offsets to other derivative positions, as well as certain assets that do not fall into any of the portfolio composition categories. Depending on the extent to which the fund invests in derivatives and the number of positions that are held for future settlement, Net Other Assets can be a negative number. "Tax-Advantaged Domiciles" represent countries whose tax policies may be favorable for company incorporation. 4 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

5 MARKET-SEGMENT DIVERSIFICATION Market Segment Portfolio Weight Portfolio Weight Six Months Ago Consumer Discretionary 26.33% 27.18% Information Technology 24.94% 23.68% Financials 9.75% 9.52% Industrials 8.86% 8.68% Materials 7.66% 6.80% Energy 6.90% 8.55% Health Care 5.96% 7.98% Consumer Staples 2.33% 3.06% Telecommunication Services 1.60% 1.58% Utilities 1.56% 0.52% Real Estate 0.78% 0.00% Other 0.00% 0.00% FISCAL PERFORMANCE SUMMARY: Periods ending July 31, Month Cumulative YTD 1 3 Annualized 5 10 / LOF 1 Fidelity Leveraged Company Stock Fund Gross Expense Ratio: 0.80% % 11.90% 17.45% 3.96% 13.02% 5.40% S&P 500 Index 9.51% 11.59% 16.04% 10.87% 14.78% 7.74% Credit Suisse Leveraged Equity Index 4.88% 9.02% 17.95% 2.14% 10.73% 3.29% Morningstar Fund Mid-Cap Value 4.03% 5.76% 14.05% 7.27% 13.56% 6.88% % Rank in Morningstar Category (1% = Best) % 90% 68% 86% # of Funds in Morningstar Category Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 12/19/ This expense ratio is from the prospectus in effect as of the date shown above and generally is based on amounts incurred during that fiscal year. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate; therefore, you may have a gain or loss when you sell your shares. Current performance may be higher or lower than the performance stated. Performance shown is that of the fund's Retail Class shares (if multiclass). You may own another share class of the fund with a different expense structure and, thus, have different returns. To learn more or to obtain the most recent month-end or other share-class performance, visit fidelity.com/performance, advisor.fidelity.com, or 401k.com. Total returns are historical and include change in share value and reinvestment of dividends and capital gains, if any. Cumulative total returns are reported as of the period indicated. Please see the last page(s) of this Q&A document for most-recent calendarquarter performance. 5 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

6 Definitions and Important Information FUND RISKS Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. Fixed income investments entail interest rate risk (as interest rates rise bond prices usually fall), the risk of issuer default, issuer credit risk and inflation risk. Leverage can magnify the impact of adverse issuer, political, regulatory, market, or economic developments on a company. In the event of bankruptcy, a company's creditors take precedence over the company's stockholders. Although the companies that the fund invests in may be highly leveraged, the fund itself does not use leverage as an investment strategy. in a category will always receive a rank of 1%. % Rank in Morningstar Category is based on total returns which include reinvested dividends and capital gains, if any, and exclude sales charges. RELATIVE WEIGHTS Relative weights represents the % of fund assets in a particular market segment, asset class or credit quality relative to the benchmark. A positive number represents an overweight, and a negative number is an underweight. The fund's benchmark is listed immediately under the fund name in the Performance Summary. IMPORTANT FUND INFORMATION Relative positioning data presented in this commentary is based on the fund's primary benchmark (index). Unless otherwise disclosed to you, in providing this information, Fidelity is not undertaking to provide impartial investment advice, act as an impartial adviser, or to give advice in a fiduciary capacity. INDICES It is not possible to invest directly in an index. All indices represented are unmanaged. All indices include reinvestment of dividends and interest income unless otherwise noted. Credit Suisse Leveraged Equity Index is a market-value-weighted index designed to represent securities of the investable universe of the U.S. dollar-denominated public equity of issuers in the high yield debt market. S&P 500 is a market-capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. MARKET-SEGMENT WEIGHTS Market-segment weights illustrate examples of sectors or industries in which the fund may invest, and may not be representative of the fund's current or future investments. Should not be construed or used as a recommendation for any sector or industry. RANKING INFORMATION 2017 Morningstar, Inc. All rights reserved. The Morningstar information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or redistributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Fidelity does not review the Morningstar data and, for mutual fund performance, you should check the fund's current prospectus for the most up-to-date information concerning applicable loads, fees and expenses. % Rank in Morningstar Category is the fund's total-return percentile rank relative to all funds that have the same Morningstar Category. The highest (or most favorable) percentile rank is 1 and the lowest (or least favorable) percentile rank is 100. The top-performing fund 6

7 Manager Facts Mark Notkin is a portfolio manager at Fidelity Management & Research Company (FMRCo), the investment advisor for Fidelity's family of mutual funds. Fidelity Investments is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing and other financial products and services to more than 20 million individuals, institutions and financial intermediaries. In this role, Mr. Notkin manages Fidelity Capital & Income Fund (since 2003) and Fidelity Leveraged Company Stock Fund (since 2016). Additionally, he co-manages VIP Strategic Income Portfolio (since 2003), Fidelity Strategic Income Fund (since 1999), and Fidelity Advisor Strategic Income Fund (since 1999). Prior to assuming his current management responsibilities, Mr. Notkin managed VIP High Income Portfolio from 2001 to 2003 along with various high-yield portfolios starting in Before joining Fidelity in 1994 as a high-yield analyst, Mr. Notkin was an assistant to the chief financial officer at Sunbeam-Oster Company, Inc. from 1992 to Previously, he worked as an assistant vice president of corporate finance at Bank of Boston from 1989 to 1992 and as a credit analyst at Fleet Financial Group from 1988 to He has been in the investments industry since Mr. Notkin earned his bachelor of science degree in medical engineering from the University of Massachusetts at Amherst and his master of business administration degree from Boston University. 7 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

8 PERFORMANCE SUMMARY: Quarter ending June 30, Annualized 5 10 / LOF 1 Fidelity Leveraged Company Stock Fund Gross Expense Ratio: 0.80% % 2.46% 12.25% 4.74% 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 12/19/ This expense ratio is from the prospectus in effect as of the date shown above and generally is based on amounts incurred during that fiscal year. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate; therefore, you may have a gain or loss when you sell your shares. Current performance may be higher or lower than the performance stated. Performance shown is that of the fund's Retail Class shares (if multiclass). You may own another share class of the fund with a different expense structure and, thus, have different returns. To learn more or to obtain the most recent month-end or other share-class performance, visit fidelity.com/performance, advisor.fidelity.com, or 401k.com. Total returns are historical and include change in share value and reinvestment of dividends and capital gains, if any. Cumulative total returns are reported as of the period indicated. Before investing in any mutual fund, please carefully consider the investment objectives, risks, charges, and expenses. For this and other information, call or write Fidelity for a free prospectus or, if available, a summary prospectus. Read it carefully before you invest. Past performance is no guarantee of future results. Views expressed are through the end of the period stated and do not necessarily represent the views of Fidelity. Views are subject to change at any time based upon market or other conditions and Fidelity disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Fidelity fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity fund. The securities mentioned are not necessarily holdings invested in by the portfolio manager(s) or FMR LLC. References to specific company securities should not be construed as recommendations or investment advice. Information included on this page is as of the most recent calendar quarter. S&P 500 is a registered service mark of Standard & Poor's Financial Services LLC. Other third-party marks appearing herein are the property of their respective owners. All other marks appearing herein are registered or unregistered trademarks or service marks of FMR LLC or an affiliated company. Fidelity Brokerage Services LLC, Member NYSE, SIPC., 900 Salem Street, Smithfield, RI Fidelity Investments Institutional Services Company, Inc., 500 Salem Street, Smithfield, RI FMR LLC. All rights reserved. Not NCUA or NCUSIF insured. May lose value. No credit union guarantee Diversification does not ensure a profit or guarantee against a loss.