Q–I own shares of Fidelity Contrafund, which has been a mediocre performer recently even though it used to be one of the best. Contrafund recently closed and the company opened Contrafund II under a different manager. Should I invest more money in my existing Contrafund or consider Contrafund II?
A–Both funds have their merits.
Your holding, the $33.6 billion Contrafund, gained 27.99 percent over the past 12 months to rank in the upper one-third of large blended funds. Its three-year annualized return of 26.01 percent is at the midpoint of its peers.
“Contrafund grew so large that Fidelity decided to close it, for portfolio manager Will Danoff’s strength in picking smaller stocks had been curtailed a bit by that large size,” observed Nikolas Lanyi, editor of the Fidelity Insight newsletter of Kobren Insight Management, P.O. Box 9135, Wellesley Hills, Mass. “However, we still think Contrafund is a good fund and consider Danoff one of Fidelity’s most talented stock pickers.”
Contrafund’s biggest emphasis areas are technology, finance, media and leisure and retailing. Its top holdings are Tyco International Ltd., Worldcom, Microsoft, Time Warner, CBS, AT&T, CVS, Lucent Technologies, Gillette and Loral Space & Communications Ltd. It closed to new investors in early April.
Initiated that same month, Contrafund II now has $266 million in assets and requires a 3 percent “load” (initial sales charge) and $2,500 minimum initial investment. Its top groups are technology, health care, finance, services and media and leisure, but actual portfolio holdings have not yet been released.
Contrafund II portfolio manager Jason Weiner, a close associate of Danoff’s, continues to manage Fidelity Export & Multinational Fund as well. He’ll be better able to invest in small company stocks because the fund is much smaller than Contrafund, but will also own medium- and large-capitalization stocks.
“We have both funds listed as buys and especially think the smaller asset size of Contrafund II gives it a very good chance of outperforming the overall market,” concluded Lanyi.
Q–I believe that once the U.S. embargo on trade with Cuba is lifted, there will be many opportunities there. I’d like to invest before prices skyrocket. What vehicles exist that will let me participate in a future investment surge?
A–Your choices must indeed be based on future expectations.
For example, the Herzfeld Caribbean Basin Fund, a closed-end fund whose share price is up 22 percent in the past 12 months, owns shares of Florida East Coast Industries. Its railroad line running from Jacksonville, Fla., to Miami would benefit from goods shipped to and from Cuba.
The fund also has large positions in both the Carnival and Royal Caribbean cruise lines, which would benefit from adding Cuba as a port of call. Another stock, Watsco, which is in the Florida air-conditioning business, is another great Cuba play, the fund believes. Worldcom is in the portfolio because under exempted industry status it was the first long-distance company to resume service to Cuba.
“Cuba is the hub of the Caribbean basin and the entire region would see a boom if the U.S. embargo of Cuba is lifted at some point,” asserted Thomas J. Herzfeld, president of Thomas J. Herzfeld Advisors in Miami.
Q–On the advice of my broker, early last year I bought 200 shares of Chesapeake Energy Corp. for my individual retirement account. Should I sell now, or wait?
A–Better days should be ahead.
This independent oil and natural gas producer suffered a loss of $256 million in the first quarter of this year, due to a charge based on its acquisition of Hugoton Energy Corp. and a decline in oil and natural gas prices.
Chesapeake Energy Corp., among the five most active drillers of new wells in the United States, contends its poor results last year and this year have been aberrations, and has a strong repositioning effort underway to expand its natural gas assets, exploration efforts and joint ventures.
There are some believers on Wall Street, with the consensus recommendation on the stock of Chesapeake Energy a “buy,” according to the I/B/E/S International research firm. That includes two “strong buys,” two “buys” and three “holds.”
An 85 percent decline in earnings is projected for this year, which should improve considerably next year with an expected 240 percent gain. The five-year expected company earnings growth rate is 6.8 percent, versus 13.8 percent for the oil industry as a whole.
“Earnings expectations have been revised lower and lower, but Chesapeake Energy is still showing positive cash flow,” noted Joseph Abbott, equity analyst with I/B/E/S. “There’s a wide disagreement among analyst forecasts, which indicates more risk is involved with this stock.”
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Andrew Leckey, a financial anchor on the CNBC Cable Television Network, answers reader questions only through the column. Address inquiries to Andrew Leckey, “Successful Investing,” 76 N. Maple Ave., Suite 367, Ridgewood, N.J. 07450, or by e-mail at successinv@aol.com.
