FOCUS 2025: Concentrated investing in U.S. equities – Stephen DuFour

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Steve, it's good to have you up here.

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Thank you for having me.

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He was just telling me how impressed he was with the room and with the crowd.

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He can't see everybody through the camera but that's a big crowd too.

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You should take a picture for your kids before we get off stage.

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I saw Steve back in September in Boston

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and he said, I can't wait to come down to Florida.

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I said, great, particular reason?

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He said, because it's named after my fund.

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I said, what do you mean? He says, well, I run U.S. Focus Stock Fund and this

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is FOCUS Palm Beach so we can go with that.

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I wanted to start with the fact that this session that we're doing for the next

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30 minutes is about concentrated investing in U.S.

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equities. I know there's a lot of concentration behind what you do

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but there's also a concentration in equity selection.

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You've got 40 stocks in this big market.

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36.

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Let's start there.

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Tell us all about it. Let's unpack it.

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The way I look at it, my one advantage ...

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couple things, stocks follow earnings.

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My one advantage is I work at Fidelity and we have access to

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companies and able to probe their growth

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potential, their earning potential.

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I use that advantage

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to go through the S&P 500 and quickly get rid of things that we cannot

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own in a concentrated manner, companies that are over levered, companies

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that don't earn money, companies that don't grow the revenues, and it leaves a

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group of stocks that I then focus my time on.

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You run a concentrated

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fund, as I told audiences before,

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my goal is to crush the S&P 500 and

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not lose my job.

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You can crush the S&P 500 one year and then get

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fired the next year if you own two different

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types of stocks.

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I tend to own stocks that are kind of down the fairway.

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Companies that are growing their revenues, companies that are growing their

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earnings faster than the market and they're trading at reasonable

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multiples. What I do is as they appreciate

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in things I recycled the money and put it in the next name.

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It keeps the fund associated

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usually with some very good secular growth themes, not

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because I'm saying I want to buy these growth themes because you never want to

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buy a growth theme, you want to follow the earnings.

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If you follow the earning the fund usually has some good growth themes in it.

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That's what I do every day.

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Where did you come up with 36, and what's the range?

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Well, the range, I can go to 60.

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36 as I've told people is ...

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and I wish I could tell you it's some type of logarithm and I've got this

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thing but basically I have a screen on my desk.

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I run five different funds.

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For this fund and the U.S.

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version of it, basically, I decided I'm going to do one

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column on my spreadsheet, so 36 is

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one column. I know if I get outside of the column I

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need to get rid of a name.

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That's how I do it.

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If somebody buys you a bigger monitor does the fund get larger?

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A bigger monitor or if I change the font.

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I'll be back here next year it could be 44 names.

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If I go from 10 font to 12 or 9 font, whatever, it

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could go up. That's what I do.

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It's a good point. I was talking earlier before I came up here,

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I run zero cash.

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Well, you can't run zero cash, I have 0.2 cash because you have flows

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coming in and out.

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A name has to win its way on the team.

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As I look at my 36 stocks and today, not today, I'll be on a plane,

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but tomorrow when I'm meeting with a company as I look at it and I look at the

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upside downside I'm like, is this team, is this player better

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than something in the fund exists that I already have?

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When something happens I have two trades.

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One comes out and one comes in because it makes me ...

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I don't want to have name creep.

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I want to keep it in the best names.

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There's a lot of times when we go into things,

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electricity is a big thing with AI and stuff like that, there's about seven

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or eight great ways to play electricity.

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I've got to pick one.

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There's five or six good ways to play connectivity.

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I've got to pick one.

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It makes me not only get the earnings right,

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the trajectory right, but then I've got to pick, hopefully, the

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name right within the group.

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Let's talk more about that scrutiny of picking names.

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You said about meeting with companies, which you'll do tomorrow, I'm sure.

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You're on the 11th floor, the 14th floor is where all the companies come in.

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You can go up and see anybody you want.

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That's true of anybody, any investment professional at the firm.

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When you go in to see a CEO or whoever is sent to talk to Fidelity

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what kind of questions are you asking these days, especially in this

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environment, in general.

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Depending on what industry they're in you're asking what the core of their

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business like this and then you stop and you say, okay, AI,

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is it going to be a benefit or a threat, and what are

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you doing? Not only is AI the number one investment

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theme for most people running growth money in the U.S., the

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next leg of AI is going to be which companies

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adopt it the fastest and the best.

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Whether you're running a hospital, whether you're running an insurance company,

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we just talked to an insurance company, the stuff that AI is going to do for

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the collection of data before

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they make the underwriting decision.

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He went through, this company went through how they're underwriting all the

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hotels owned by Marriott around the world.

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It usually took them three months to get the data into a folder

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where they could sit down and decide this is going to be our price.

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Basically, he goes we're doing that now in one day.

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Things like that, it's going to save a lot of people money.

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Basically, this is not a very hard business.

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How fast your revenue is growing, are your margins going flat down or up, how's

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your balance sheets interest expense, any change in the tax rate, are you

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buying back shares, issuing shares, and how much capex are you spending, and

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what are you using your free cash flow for? The process

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of going through companies is the same but now

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we have a new tool, no different than

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the cotton gin or the Gutenberg press or the internet.

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We have a new tool that people can enter into their system.

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For some people it's going to be great,  for some people it's going to be

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really, really bad.

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You see AI as something to amplify what teams do versus

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something that's going to get in the way if they adopt it correctly.

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Correct.

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Hello, investors. We'll be back to the show in just a moment.

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DialoguesFidelity podcasts available on Apple, Spotify, YouTube, or wherever

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else you get your podcasts. Now back to today's show.

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Earnings season's begun.

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I just want to preface it actually by saying, I think I saw this morning on

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CNBC, CEO confidence seems to be faltering.

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Do you sense that or have you sensed that in meetings that you're doing?

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Just depends what industry you're in.

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I don't really look at

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pools of things like that because if you're trying

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to sell boats, RVs, cars,

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anything that is over 50 — and even houses — anything that's over

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55 to 70% financed,

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and you ask them how business is, business is really bad.

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But then if you go over here and you talk to people that are doing HVAC

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for data centres, electricity for data centres, anything for data

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centres, it's never been better.

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Even in some of the exciting new GLP-1 drugs and stuff

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like that, they can't build the factories fast enough.

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When you take a survey of all of them and say it's going like this,

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as a focused fund manager I really could care less.

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I feel bad for them but I could care less about what's happening over here

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because most of my names I own are,

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as you'll see Will Danoff later today, are smiley face type companies.

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You mentioned AI data centres, those are bigger than Amazon warehouses,

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they're one to two million square feet.

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They're popping up all over the place and they have a lot of inputs.

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I'm sure you see so many companies that are supplying widgets and

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all sorts of things for these data centres.

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How does that affect you from a concentration standpoint?

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You want to keep your 36 to 60 names but now there's all these interesting

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companies that have got a new business supplying data centres as an example.

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That's a great question.

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As a new name comes in you're like, what is this doing for our stew?

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I look at the fund a lot of different ways and one way is it's a nice beef

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stew. You don't want the beef stew to have too much potatoes,

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have too much meat or too spicy, it's

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got to be right there. So you can go all in and have all AI

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but then you've got too much Tabasco sauce.

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Basically, as you look at this thing you have to understand, a new name, what

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is it doing for the portfolio?

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Yes, it may be coming in connectivity but it's not

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the correlation with doing HVAC and connectivity or

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transformers versus HVAC.

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It's really the same, it's the same capex dollar.

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The fact that you're adding a name but at the expense of something that has to

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come out you must digest an incredible amount of information that comes through

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you. How do you deal with that as a portfolio manager?

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That's a very good question.

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The biggest thing I wish we could go back in

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time and get rid of is email.

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I really hate email.

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I think it was one of the worst inventions we've ever had.

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I get 1,000 emails a day.

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Even when you're on the road you get up early, you open your thing and you sit

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there with the delete button going t-t-t-t-t-. Then you read

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three or four out of a thousand. Data

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processing is what I do.

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I have that, I have our internal research, I have the street research

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and then you have the conference call.

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One of our top 10 holdings, Bank of New York, reported this morning

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in a 07:30 conference call.

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I didn't listen to it, I was doing a photo shoot outside.

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You've got to have priorities in life.

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That's what I do, I have to prioritize my time on

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where to go.

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I'm going to repeat myself again.

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I need to go through, there's 504 stocks in the SP 500, at

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the end of every quarter I have a massive spreadsheet and I sit down and I have

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a price target of upside and downside for all 504.

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Some are based on dividend yields, some are price-to-sales, some are

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price-to-earnings, some are a price-to-book, some are just have to make up

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because they have no revenues, earnings or anything.

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Basically, as I go through that I have piles of ...

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it's like fishing. You're like, no one has ever caught a fish over here, do not

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fish here. Sometimes you catch a fish here, take a little look, but

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the fishing is good right here.

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I spend my time in this pile.

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Each quarter and every day I'm basically trying to figure out what

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stuff is moving from the do not fish into the fish, and what is going from

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fish into everyone's already caught up with the fish.

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As I look at this thing, it's a game and I'm basically

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moving the parts around to make sure we have the best 36 players.

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I don't know what I want to have for lunch, beef, stew or fish but we'll figure

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that out later.

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Neil Constable is going to be up speaking later. He heads up QRI, Quantitative

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Research and Investing. Does that factor into helping you

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filter names, the whole quantitative ...

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this is kind of new stuff for the industry but for Fidelity it's a big

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expenditure. How does that help?

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Oh, it helps a lot.

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I'm greedy so I wish it was going faster.

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I don't know if Neil's out there. As I look at my

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stuff I have now different ways of looking

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at this information. I found someone who is going

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through all of the research notes and giving me a score based

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on the words that are used in the research note to determine whether it's a

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happy face or a frown.

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I have someone else that is going through and doing changes so

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in your model if you change anything it's a red flag, said, ooh,

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they changed their margin. If you look at these spreadsheets ...

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you talk about 36 names 10 font, these

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things are 6 font and you're like this going, who can read that number?

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I've gotten another person doing screens.

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This morning

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Bank of New York was supposed to earn $1.74 and they earned $1,91,

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earnings up 23% so the out-year earning changes.

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I have something that's automatically showing me what the '26 and '27

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earnings changes are and it gives me the next day.

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I get the list of companies who's earned ...

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because stocks follow earnings so I've got people watching

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the earnings, the sentiment, and going through my

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data that I can't process.

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Wow. You said stocks follow earnings, Will Danoff talks about that a lot.

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I think you sit beside him office-wise.

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Two doors down.

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What have you learned from Will? What's it like working with him, who has a

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larger number of holdings than you do as well.

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Oh, he has 22 times more holdings than I do, roughly.

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Yeah, that's my math too.

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Will and I have worked together for 34 years and it's

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his energy and he goes to the next meeting.

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He's doing it.

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I'll be sitting in my office, it's getting late in the day, I'm thinking which

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train am I going to catch going home? He comes by and he goes, so-and-so's in.

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I'm like, oh, yeah, they are, aren't they?

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Next thing you know I've got my clipboard, we're upstairs at the meeting.

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I'm thinking I could have missed that one.

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What I've learned from him is go see everything.

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The key, so I told you I'm avoiding this and buying this

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but you don't know how good this is without

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knowing how bad that is.

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You have to see the whole spectrum of stocks to know that, you know what,

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that's awful and it's trading at 8.8 times EBITDA.

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That's medium bad and that's at 9.6 times.

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That's okay and it's at 10.7.

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This is awesome and it's only at 11.

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You need the whole spectrum to do valuation.

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From Will, it's go see another company,

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go see another company.

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No one sees more companies than him.

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And he drags you along.

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Well, only now and then because he knows what industries I used to cover.

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Newspapers, printing, cheque printing, railroads, trucking, shipping, cable,

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cable equipment, and energy.

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He, as an analyst, he'll come in and go,

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oh, CSX Railroad's in. I'm like, I'm not going to buy CSX railroad.

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I'm like, okay, I'm going, I'm up there. When he sees something that he knows I

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have covered in the past, but that was

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in 1992.

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I try to remind him, Will, that was in 1992 which is a long time ago.

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It brings up a great point that analysts cover a

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vast amount of sectors before becoming a diversified portfolio manager.

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What was your favourite sector when you were an analyst, if you think back to

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that time?

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Railroads. They just changed the rules on pricing

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which they just started earning money and then that set off

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the ... it was the Staggers Act and they basically were able to change

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the way they did pricing.

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Then what happened it set off all the mergers.

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Burlington Northern bought Santa Fe, Union Pacific bought Southern

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Pacific, Norfolk Southern and

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CSX, they split Conrail.

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It's fascinating, for everyone watching this,

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I think the initial bid was 55, the next one bid 60, 65,

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70, 75, 80, 90, they got to 100 and they said, okay, let's just

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split it. So they paid twice as much as they should have paid and they only

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got half. It was an exciting time because not only was the

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business model changing ... because you've got to remember they had an

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operating ratio which is the inverse of operating income.

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They had operating ratios of kind of 92 to 93 and now the industry

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is at 63.

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That 30 points, 30 points of operating margin happened

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mostly during that period and that's why they were doing mergers, and they

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continue to do mergers because they can go in and cut a lot of costs.

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You remembered a lot of detail from the '90s.

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That was great. That shows how it formed a lot of your thinking today.

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Question's just come in, a lot of people saying the market is very expensive

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but our audience are asking about how do you assess current valuations, where

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they are right now, or how are you assessing current valuations and which

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risks are most important to monitor.

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There's a lot of risks. Tariff risk, location risk, currency risk, there's

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a lot of risks right now which we saw earlier in the year.

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I'm monitoring all of them.

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You have to know what you own and what risks you have.

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Valuation does not bother me right now.

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As I said, please stay away from questions on gold prices

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or currencies or oil price, I know none of this stuff.

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I follow earnings.

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I am paying 2.6 P/E points.

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You take the P/E of the S&P 500,

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my fund is 2.6 points higher than the S& P 500.

[00:20:00.232]

The S&P 500 earnings looking out by the estimates is,

[00:20:04.803]

I believe, 14.7 but

[00:20:08.807]

the estimates for my stocks are over 30.

[00:20:11.743]

I'm paying two points for twice the earnings

[00:20:15.914]

growth of the market.

[00:20:18.517]

That's Nirvana.

[00:20:21.420]

People go, well, the forward P/E or the History P/E,

[00:20:25.457]

really interesting to me but I don't spend any time on that.

[00:20:28.427]

I just need one new name.

[00:20:30.562]

I get up, I write on my paper thing, Focus Fund, one

[00:20:34.533]

new name on top of my yellow page. I am a

[00:20:38.870]

shopper. Who's ever shopped at T.J.

[00:20:41.173]

Maxx or Marshalls?

[00:20:44.843]

I am a T.J. Maxx shopper.

[00:20:47.846]

The store is filled with lots of stuff.

[00:20:50.415]

I get up in the morning and what got delivered last night that is mispriced.

[00:20:55.454]

I'm going through there and trying to find something that is great,

[00:21:00.158]

that is what I do. If I can find one new name I've had a good day, or

[00:21:04.663]

a good week, a good month.

[00:21:07.699]

Interesting. Speaking of new names, there's a question about turnover.

[00:21:09.935]

Are you happy if you go through a year you don't find anything that needs to be

[00:21:13.472]

replaced, that the portfolio is consistent a year later, or

[00:21:18.543]

is there a frequency that you look for?

[00:21:22.581]

I don't solve for turnover.

[00:21:25.851]

There's great turnover which is, I bought the stock at

[00:21:30.155]

30, it's now at 92 and

[00:21:34.159]

it's now reached where we're price [indecipherable] and I don't stay

[00:21:38.297]

too late at the party. Rule number two, which

[00:21:42.501]

is don't get fired, as things get expensive

[00:21:47.739]

I try and keep my ratio of P/E to the market in

[00:21:52.144]

band and as things do appreciate I recycle that money and

[00:21:56.315]

put it down and put a new name in. You talk about

[00:22:00.385]

the Toronto Blue Jays, I basically am owning these stocks

[00:22:04.456]

from inning three or four to inning six or seven.

[00:22:08.393]

I don't buy them in inning one two or three and I don't own them in inning

[00:22:12.364]

eight and nine. I am right here.

[00:22:15.367]

Your business is getting better, I think it can last longer or be higher

[00:22:19.004]

magnitude, as people start writing reports about how that's

[00:22:23.108]

going to happen I'm saying, all right, people know it and then I take the money

[00:22:26.712]

and I recycle it in the next name.

[00:22:30.615]

That's good.

[00:22:31.416]

The bad turnover, which we had some earlier this year, it was

[00:22:35.587]

bad, would be you have a story

[00:22:40.292]

... we had one company that was an incredible company but

[00:22:44.396]

they did a lot of government contracting.

[00:22:47.666]

When you have Elon Musk on stage with a chainsaw saying he's going to

[00:22:51.970]

rip up all government contracts that usually is not good for a

[00:22:55.907]

government contracting company.

[00:22:59.745]

That one could not foresee and that one

[00:23:04.216]

irks me. Still irks me.

[00:23:06.785]

Sorry about that, sorry for that question.

[00:23:10.489]

Let's move along. If you look at the top ten one of the companies is

[00:23:14.493]

DraftKings. There must be a story behind that.

[00:23:17.863]

You couldn't do online gambling in the United States until the

[00:23:21.967]

Supreme Court changed the rules in 2018.

[00:23:25.103]

Took people a little while from getting approval to get

[00:23:29.074]

going and then basically what they decided, each state kind of came up with

[00:23:33.078]

their rules but one of the main rules was if you have an existing casino

[00:23:37.349]

you get an online licence with it.

[00:23:42.721]

You all probably didn't get bombarded ...

[00:23:45.023]

we spent the next two years with just all the advertising

[00:23:49.094]

on TV. Now it's all drugs and

[00:23:53.398]

it's all drug stocks but back then it was basically

[00:23:57.536]

... and they all fought it out.

[00:23:59.838]

What happened is we went from MGM, Caesars,

[00:24:05.010]

PENN gaming, blah, blah, blah, blah, down to two players, FanDuel and

[00:24:09.147]

DraftKings. I owned a few of the casinos as I was learning this

[00:24:13.084]

area because they made money.

[00:24:17.155]

DraftKings did not make money but I started getting interested when they

[00:24:21.193]

turned profitable.

[00:24:23.028]

What's happening is when you do a single bet for gambling they earn a

[00:24:27.199]

4% hold.

[00:24:29.301]

That is pretty good. Right now the growth is in parlay where you put

[00:24:33.371]

three things together and the hold is 14%.

[00:24:36.575]

As their business mix changes they have less competition, the promotion cost

[00:24:40.712]

is going down, they're earning money, buying back stock, it's

[00:24:45.383]

good. Now

[00:24:50.722]

I have to worry about prediction markets but that's tomorrow's problem.

[00:24:53.091]

Which market?

[00:24:53.792]

Prediction.

[00:24:56.628]

As I tell people there is no perfect stock.

[00:24:59.764]

You're giving up something,

[00:25:03.869]

you have to compromise on something.

[00:25:05.670]

I love listening to people and they say I only buy stocks with

[00:25:09.741]

great management, good blah, blah, blah, blah.

[00:25:11.676]

I go, that's great, what stock is that?

[00:25:14.913]

Because if you have all that then the valuation's too high.

[00:25:18.350]

We're going to wrap up soon but I wanted to go back to AI for a second because

[00:25:23.622]

I saw today that also Apple lost a senior exec to

[00:25:27.926]

Meta and that's probably something that's going on a lot from an AI standpoint.

[00:25:32.097]

Is that something that you see, a lot of poaching, if you will, from firm to

[00:25:35.500]

firm?

[00:25:36.668]

Correct.

[00:25:38.203]

Is that a concern?

[00:25:40.939]

It all depends. If you're losing people it's

[00:25:45.176]

a little concern. It's kind of like the PGA golf tour.

[00:25:50.448]

Some of these players left, went to live ...

[00:25:54.119]

and you sit there going, ah, does that mean PGA is over?

[00:25:56.388]

You can't look at that.

[00:25:57.989]

Some of the contracts that Meta is giving these people you're like

[00:26:02.193]

... but if you are losing people you need to watch it.

[00:26:04.796]

A number of these people say there's basically 135

[00:26:09.467]

AI gurus

[00:26:13.505]

and they're all fighting for these 135 people.

[00:26:18.510]

As they're all changing seats the money they're getting is astronomical.

[00:26:23.682]

I don't know, some of these football teams, if you look at them they have

[00:26:27.719]

a great quarterback, great running back but they lose.

[00:26:32.357]

Just because you go and get these people doesn't mean you're going to win.

[00:26:36.027]

I mean, Notre Dame is playing USC this weekend, not that I care, love Notre

[00:26:39.731]

Dame, but USC every year has three

[00:26:44.002]

times as many people go to the NFL as Notre Dame.

[00:26:46.705]

You sit there, their quarterback looks good, he's gonna go play, they're

[00:26:50.141]

running like this but they lose because they're not a team, they're

[00:26:53.578]

individuals.

[00:26:54.312]

Just 'cause you're going out and paying all these people money, and they all

[00:26:57.616]

have egos, kind of like portfolio managers, and you put them all on the thing

[00:27:01.086]

like this, doesn't mean you're going to have a great stew.

[00:27:04.756]

Just because you've got somebody doesn't mean, wow, you're going to be a

[00:27:07.592]

winner. I've seen a lot of teams with great players that just don't ...

[00:27:11.630]

it's not a team.

[00:27:13.565]

It's like NBA playing in the Olympics and stuff like that.

[00:27:17.602]

Our team is 100% better but some of these teams that have been playing together

[00:27:20.338]

actually are a lot better than the prima donna NBA players.

[00:27:23.608]

You have a lot of great analogies. You also have a a lot on your plate but you

[00:27:26.444]

seem to be processing it all very, very well which is why there's been such

[00:27:29.314]

great success. Congratulations on that.

[00:27:31.616]

We have to go to, before we shut down, five fun questions

[00:27:35.754]

about you. This is something new and this is something that's going to be

[00:27:38.456]

unrelated to what's in the portfolio. First question, hidden talent.

[00:27:44.195]

Gardening.

I'd love to explore that but we don't have time.

[00:27:45.864]

Underrated vacation spot.

[00:27:47.799]

Ooh, underrated vacation spot.

[00:27:49.534]

You're not allowed to read the question.

[00:27:52.370]

Okay. Underrated vacation spot. How long do I have to think about this?

[00:27:55.206]

Three minutes.

[00:27:55.907]

Okay, wow.

[00:27:58.309]

Cape Cod.

[00:28:00.512]

Zoom calls or in person?

[00:28:02.313]

Oh, in person.

[00:28:03.848]

I like that. What's a movie or show you can watch endlessly?

[00:28:17.195]

John Wick.

[00:28:18.063]

How many times have you seen it?

[00:28:19.998]

Particularly during COVID I got to the point where my wife told me I had to

[00:28:23.134]

stop watching it because it was on ...

[00:28:25.303]

either Wick one, Wick two, Wick three, it would be on.

[00:28:27.839]

I never watched the whole thing but I always would watch 20 or 30 minutes

[00:28:31.876]

right in the middle. She would come down and I'd see her and I'd turn it off.

[00:28:35.747]

I could watch that, I could watch John Wick all the time.

[00:28:42.253]

Star Wars or Star Trek?

[00:28:44.556]

Oh, Star Trek.

[00:28:47.425]

I'm not going to explore any more of those. We have two minutes left so I do

[00:28:50.061]

want to ask, what should we be thinking of as we approach 2026

[00:28:54.065]

market-wise? Just going back to that.

[00:28:59.170]

We have green days, red days, green days, red days based on government

[00:29:03.108]

closed, government open, we hate China, we love China.

[00:29:08.480]

Rare earths, no rare earths, blah, blah, blah, this blah, blah, blah.

[00:29:10.949]

Underneath all that stuff there is a trend of a

[00:29:15.053]

new technology.

[00:29:17.355]

You turn on the TV, is it an AI bubble and blah, blah, blah, blah.

[00:29:20.725]

No. It hasn't even gotten to the companies

[00:29:24.829]

using it.

[00:29:26.865]

We still have a long way to go. There's going to be some great

[00:29:31.069]

winners and there's going to some really bad losers.

[00:29:33.371]

I've got to turn the card over

[00:29:37.475]

and say, keep, don't keep, keep, don't keep.

[00:29:43.214]

As that happens it's a fascinating time because it's going to change

[00:29:47.385]

a lot of things we do, how we process information and do stuff.

[00:29:53.291]

This is an exciting to be in the stock

[00:29:57.328]

market because you're not asking ...

[00:30:00.131]

you said, what questions are you asking, I've been doing this a long time and

[00:30:03.935]

you go into the company with no changes going like this, so how are

[00:30:08.039]

sales? Now there's just new stuff and you can see

[00:30:12.210]

some excitement. This is a great time to

[00:30:16.514]

be picking winners and losers.

[00:30:18.716]

It's fascinating to talk to you. Steve DuFour, thanks very much.

[00:30:23.188]

Thanks for watching or listening to the Fidelity Connects

[00:30:27.125]

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