Fidelity Select Transportation Key Takeaways For the semiannual reporting period ending August 31, 2017, the fund advanced 2.33%, topping the 1.39% gain of the MSCI U.S. IMI Transportation 25/50 Index but trailing the 5.65% return of the broadly based S&P 500. Despite healthier global freight trends, strength in trucking and air freight & logistics was largely offset by muted gains in the railroads group and, in particular, weakness in airlines. Against this backdrop, Manager Matt Moulis's focus on stocks he considered inexpensive relative to peers and that appeared to have positive catalysts worked relatively well this period. Versus the MSCI industry index, the fund's performance was bolstered by positioning in airlines and stock selection in the air freight & logistics segment. Conversely, picks in railroads weighed on relative results, as did positioning in trucking. If recent global freight trends continue, Matt expects a relatively favorable environment for transportation companies. Corporate tax reform, if it occurs, could be another positive. Matt also will be watching to see how the Trump administration approaches trade issues. Furthermore, rising labor costs and relatively rich stock valuations remain considerations. The Board of Trustees has agreed to present a proposal to shareholders to eliminate each sector/industry fund's fundamental "invests primarily" policy and to modify the fundamental concentration policy for certain funds. If the proposals are approved, expected in the fourth quarter, the changes will take place on or about January 1, 2018 (or the first day of the month following shareholder approval), and will not impact how the funds are managed. MARKET RECAP The U.S. equity bellwether S&P 500 index returned 5.65% for the six months ending August 31, 2017. Following a strong start to 2017, equity markets leveled off in March amid fading optimism for President Trump's pro-business agenda and stalled efforts by Congress to repeal and replace the Affordable Care Act (ACA). Upward momentum soon returned and continued until the index cooled off in August, when geopolitical tension escalated and uncertainty grew regarding the future of health care, tax reform and the debt ceiling. In a stark reversal from 2016, growth-oriented stocks handily topped their value counterparts. Among sectors, information technology (+15%) was a standout, surging as a handful of major index constituents posted strong returns. Health care (+9%) also topped the broader market, climbing from April to period end following renewed efforts to reconsider the ACA. Conversely, financials (+1%) lagged because sentiment regarding the potential for reduced regulation and lower taxes faded as the White House turned its attention to other initiatives. Rising interest rates held back real estate (+4%). Investors' general preference for risk assets, coupled with increased competition, hampered consumer staples (+1%) and telecommunication services (-5%). Lastly, lower oil prices sent energy (-10%) to the bottom of the sector performance rankings. Not FDIC Insured May Lose Value No Bank Guarantee
Q&A An interview with Manager Matthew Moulis Fund Facts Trading Symbol: Matthew Moulis Manager FSRFX Start Date: September 29, 1986 Size (in millions): $515.16 Investment Approach Fidelity Select Transportation is an industrybased, equity-focused strategy that seeks to outperform its benchmark through active management. We follow a fundamental, value-oriented investment philosophy of buying stocks we believe are priced cheaply, relative to peers, with respect to underlying company fundamentals. We identify these stocks using Fidelity's in-depth company and industry research, focusing on good businesses in attractive spaces. Specifically, we look for firms that are consistent profit generators and have strong management teams that can produce returns above their cost of capital, efficiently convert new income to free cash flow and/or capitalize on wide avenues for growth. Attractive industry groups are characterized by solid barriers to entry, differentiated products, disciplined pricing dynamics and inelastic demand. We seek to concentrate the portfolio in our best ideas, but carefully manage risk through position sizing and subindustry positioning. Sector and industry strategies could be used by investors as alternatives to individual stocks for either tactical- or strategic-allocation purposes. Q: Matt, how did the fund perform for the six months ending August 31, 2017 The fund advanced 2.33% this period, topping the 1.39% gain of the MSCI U.S. IMI Transportation 25/50 Index but trailing the 5.65% return of the broadly based S&P 500. The fund also lagged its peer group average, which tracks the broader industrials sector. Looking back a full year, the fund posted a strong gain that was roughly in line with the MSCI industry index and comfortably ahead of the S&P 500 and peer average. Q: How was the backdrop for transportation stocks the past six months There were quantitative and qualitative signs of improving global freight trends in 2017. For example, after seeing global trade growth by volume decelerate to 1.3% year over year in 2016, the World Trade Organization (WTO) has projected that the rate of expansion should accelerate to 2.4% in 2017. Another WTO yardstick, annualized global trade growth by value, accelerated to 4.2% in the second quarter of 2017, the fastest rate of growth since the first quarter of 2014. Additionally, WTO's World Trade Outlook Indicator (WTOI) strengthened from 102.2 in May to 102.6 in August, the strongest reading since April 2011. Readings above 100 typically indicate above-trend growth. What's more, the International Air Transport Association (IATA) reported that global air-freight volumes have increased in each of the past three quarters by about 9% to 12% year over year, more than triple the 10-year average growth rate of 3.1%. In the first half of 2017, container throughput at America's two largest ports, Los Angeles and Long Beach, increased 5.2% year over year. Despite these improving fundamentals, performance in the transportation segment was uneven, with strength in trucking and in air freight & logistics stocks largely offset by muted gains in railroads and especially by weakness in airline shares. Against this backdrop, my focus on stocks I considered inexpensive relative to peers and that appeared to have positive catalysts worked relatively well. 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.
Q: What factors lifted the fund's performance versus the MSCI industry index The fund's relative result was aided most by positioning in airlines and stock picks in air freight & logistics. At the stock level, the fund especially benefited from not owning shares of air carrier United Continental, an index name that declined about 16%. In a commodity-like market, United held the undesirable high-cost position on the U.S. airline-industry cost curve. United also made headlines in April for the forcible removal of a passenger on an overbooked flight. The stock had a modest gain for the period-to-date through mid-july, but disappointing thirdquarter guidance sent the shares lower later that month. Underweighting and, ultimately, selling our stake in Spirit Airlines also proved helpful. The company has been trying to reposition itself in small and mid-sized markets that are underserved by the major carriers, rather than trying to compete mainly on cost in the biggest markets. In the second quarter, Spirit posted growth in unit revenue (revenue per available seat mile) for the first time since 2014, and earnings per share increased for the first time in several quarters. Unfortunately, these positives were overshadowed by a labor dispute that spiraled out of control in early May, as lack of pilot availability led to widespread flight cancellations. My uncertainty about the company's restructuring efforts led me to exit our position here in June, thereby sidestepping the worst of the stock's 35% slide this period. An out-of-benchmark position in Rockwell Collins which I purchased in April also worked well this period. Shares of the aviation-equipment supplier surged in early August after news that the company might be purchased by conglomerate United Technologies. Although I liked Rockwell for its intellectual-property assets and healthy cash flow, I thought the valuation was getting stretched late in the period and significantly reduced the position. Q: How about detractors Fund picks in railroads weighed on relative results, as did positioning in trucking. Among individual holdings, the largest relative detractor was Alaska Air Group. Although I considerably reduced the fund's overall airline exposure and its position in this stock I still felt that Alaska Air's combination of solid management and favorable routes made it a "best in class" entry in this category. However, Alaska Air shares had a difficult August, largely due to a weaker fare environment across the industry. Genesee & Wyoming, the fund's largest overweighting at period end, also detracted from relative performance. The carrier is a short-line and regional freight railroad with operations in the United States, Canada, Australia, the Netherlands and Belgium. The company has grown its earnings primarily by acquisitions, and during the second quarter, it closed on two acquisitions that bolstered its revenue growth: Heart of Georgia Railroad and Providence & Worcester Railroad. But in August, the stock faltered after Genesee reported weaker carloads in its European operations, especially in its coal-hauling operations. Overweighted exposure to index heavyweight Union Pacific further hampered our relative result. I considerably increased our position here early in the period. In my view, railroads are a structurally attractive industry in which participants have a cost advantage versus their next-best substitute trucking. Additionally, competitive intensity among railroads tends to be low because of physical limitations on the ability to add or reposition capacity. Union Pacific remained a leader in this industry, and it was a stock I wanted to emphasize against a backdrop of improving demand for global freight-hauling. Unfortunately, the stock declined a bit this period. Q: Matt, what is your outlook as of period end I believe the strengthening global trade picture that I referenced earlier should bode well for transportation companies, if it continues. That said, my optimism is tempered by several factors, including relatively rich stock valuations, rising labor costs and uncertainty about whether the Trump administration will be a net positive or negative for global trade. I think parts of the president's agenda, such as spending more on infrastructure and reducing corporate taxes, could be significant positives for transportation companies. To date, though, we've not seen a concerted focus on making such legislation a reality. On the other hand, the more-protectionist parts of the Trump agenda might hurt transportation companies. Ultimately, we'll have to wait until the administration gives us more specifics. 3 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.
LARGEST CONTRIBUTORS VS. BENCHMARK Matt Moulis on how lower corporate tax rates could help transportation companies: "Corporate tax reform including lowering the corporate tax rate became a key topic following the election of President Trump. Based on my analysis, I anticipate that transportation companies could be big relative beneficiaries of this initiative. "Within the industrials sector, the transportation group including air freight & logistics, airlines and road/rail pays the highest effective tax rate (ETR), at about 36%. This compares with a 28% ETR for the S&P 500 generally and a 30% ETR for the broad industrials sector. These figures were averages for the 2014 2016 tax years. "My work also considered which transportation categories were most likely to retain any potential profit boost from lower tax rates and which were most likely to compete away the benefits. "With competitive advantages and strong barriers to entry, railroads and parcel-delivery companies seem best-positioned to retain additional profits from lower tax rates. These companies operate in markets that they dominate or, at the very least, where the field is limited to just a few key players. "On the other hand, airlines and truckload carriers seem likely to compete away any potential tax windfall, although I think it may take several years to add enough capacity to give up gains to customers through lower prices. "For example, although the airline industry has experienced considerable consolidation in the past two decades consolidation that has been accompanied by better management and morerational pricing competition remains fierce on the major routes. It also doesn't help that the industry's historical response to good times has been to add capacity, which can ultimately compromise profitability." Holding United Continental Holdings, Inc. Market Segment Average Relative Relative Contribution (basis points)* Airlines -4.20% 71 Spirit Airlines, Inc. Airlines -0.53% 37 C.H. Robinson Worldwide, Inc. Stamps.com, Inc. American Airlines Group, Inc. * 1 basis point = 0.01%. Air Freight & Logistics -0.87% 30 Internet Software & Services 0.44% 30 Airlines 0.31% 26 LARGEST DETRACTORS VS. BENCHMARK Holding Market Segment Average Relative Relative Contribution (basis points)* Alaska Air Group, Inc. Airlines 1.38% -31 Genesee & Wyoming, Inc. Class A Railroads 2.96% -29 Union Pacific Corp. Railroads 2.25% -27 Celadon Group, Inc. Trucking -0.13% -26 Hertz Global Holdings, Inc. * 1 basis point = 0.01%. Trucking -0.41% -20 4 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.
10 LARGEST HOLDINGS Holding Market Segment Six Months Ago Union Pacific Corp. Railroads 17.29% 11.59% United Parcel Service, Inc. Class B Air Freight & Logistics 13.97% 14.50% FedEx Corp. Air Freight & Logistics 6.56% 9.38% CSX Corp. Railroads 6.27% 8.09% Norfolk Southern Corp. Railroads 5.74% 4.89% Delta Air Lines, Inc. Airlines 4.43% 4.70% Genesee & Wyoming, Inc. Class A Railroads 3.90% 4.37% Expeditors International of Washington, Inc. Air Freight & Logistics 3.67% 4.16% Southwest Airlines Co. Airlines 3.11% 3.33% C.H. Robinson Worldwide, Inc. Air Freight & Logistics 3.10% 0.29% 10 Largest Holdings as a % of Net Assets 68.05% 72.09% Total Number of Holdings 40 45 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. MARKET-SEGMENT DIVERSIFICATION Market Segment Six Months Ago Railroads 34.97% 30.40% Air Freight & Logistics 32.13% 30.54% Airlines 16.26% 25.65% Trucking 9.79% 8.24% Airport Services 1.59% 0.63% Construction Machinery & Heavy Trucks 0.77% 0.68% Industrial Machinery 0.53% 0.75% Marine 0.40% 0.26% Aerospace & Defense 0.11% -- Internet Software & Services 0.10% 0.29% Other 0.00% 0.00% ASSET ALLOCATION Asset Class Six Months Ago Domestic Equities 96.64% 97.43% International Equities 0.00% 0.00% Developed Markets 0.00% 0.00% Emerging Markets 0.00% 0.00% Tax-Advantaged Domiciles 0.00% 0.00% Bonds 0.00% 0.00% Cash & Net Other Assets 3.36% 2.57% 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. 5 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.
FISCAL PERFORMANCE SUMMARY: Periods ending August 31, 2017 6 Month Cumulative YTD 1 3 Annualized 5 10 / LOF 1 Select Transportation Gross Expense Ratio: 0.83% 2 2.33% 5.61% 22.19% 7.66% 18.03% 10.32% S&P 500 Index 5.65% 11.93% 16.23% 9.54% 14.34% 7.61% MSCI US IMI Transportation 25/50 Linked Index 1.39% 5.41% 22.28% 7.34% 17.96% 10.55% Morningstar Fund Industrials 4.44% 9.49% 19.00% 8.18% 15.40% 7.73% % Rank in Morningstar Category (1% = Best) -- -- 20% 53% 24% 5% # of Funds in Morningstar Category -- -- 45 43 40 28 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 09/29/1986. 2 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. This fund has a short term trading fee 0.75% for shares held less than 30 days. 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, institutional.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. 6 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.
Definitions and Important Information 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. FUND RISKS The value of the fund's domestic and foreign investments will vary from day to day in response to many factors. Stock values fluctuate in response to issuer, political, regulatory, market, or economic developments. You may have a gain or loss when you sell your shares. Investments in foreign securities, especially those in emerging markets, involve risks in addition to those of U.S. investments, including increased political and economic risk, as well as exposure to currency fluctuations. Because FMR concentrates the fund's investments in a particular industry, the fund's performance could depend heavily on the performance of that industry and could be more volatile than the performance of less concentrated funds and the market as a whole. The fund is considered non-diversified and can invest a greater portion of assets in securities of individual issuers than a diversified fund; thus changes in the market value of a single investment could cause greater fluctuations in share price than would occur in a more diversified fund. The transportation industry can be significantly affected by changes in the economy, fuel prices, labor relations, insurance costs, and government regulation. IMPORTANT FUND INFORMATION Relative positioning data presented in this commentary is based on the fund's primary benchmark (index) unless a secondary benchmark is provided to assess performance. The Board of Trustees unanimously approved a proposal to shareholders for trustee election that would combine oversight of Fidelity's sector funds with Fidelity's broader equity and high income funds under a single Board of Trustees. If approved, the unified Board would be effective on or about 3/1/18. 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 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. Multiple share classes of a fund have a common portfolio but impose different expense structures. 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. 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. 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. MSCI US IMI Transportation 25/50 Index is a modified marketcapitalization-weighted index of stocks designed to measure the performance of Transportation companies in the MSCI U.S. Investable Market 2500 Index. The MSCI U.S. Investable Market 2500 Index is the aggregation of the MSCI U.S. Large Cap 300, Mid Cap 450, and Small Cap 1750 Indices. Index returns shown for periods prior to January 1, 2010 are returns of the MSCI US Investable Market Transportation Index. 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. 7
Manager Facts Matthew Moulis is a research analyst/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. Moulis is responsible for covering the transportation industry. He also manages Fidelity Select Air Transportation and Fidelity Select Transportation (both since 2012). Prior to assuming his current responsibilities, Mr. Moulis covered the education services, alcoholic beverages, and alternative energy industries. Before joining Fidelity as a research analyst in 2007, he was an analyst for the Analysis Group from 2002 to 2005. In this role, Mr. Moulis was responsible for working with a team to complete economic analyses and research, primarily for litigation purposes. He has been in the investments industry since 2007. Mr. Moulis earned his bachelor of arts degree in economics and history from Bates College and his master of business administration degree from MIT Sloan School of Management. He is also a Chartered Financial Analyst (CFA) charterholder. 8 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.
PERFORMANCE SUMMARY: Quarter ending December 31, 2017 1 3 Annualized 5 10 / LOF 1 Select Transportation Gross Expense Ratio: 0.83% 2 22.20% 7.83% 20.04% 12.80% 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 09/29/1986. 2 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, institutional.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 02917. Fidelity Investments Institutional Services Company, Inc., 500 Salem Street, Smithfield, RI 02917. 2018 FMR LLC. All rights reserved. Not NCUA or NCUSIF insured. May lose value. No credit union guarantee. 739089.5.0 Diversification does not ensure a profit or guarantee against a loss.