Their managers have been gravitating toward defensive stocks and companies generating good cash flows. By Andrew Tanzer, Senior Associate Editor February 11, 2009 Fidelity Contrafund and Fidelity Low-Priced Stock are now open to new investors. We recently had a chance to chat with their stewards, Will Danoff and Joel Tillinghast, two of Fidelity's best and brightest fund managers.From the time Danoff took over Contrafund (FCNTX) in September 1990 through January 31 of this year, this large-company growth fund returned an annualized 12%. That beat Standard & Poor's 500-stock index by an average of four percentage points per year. Over the dismal past ten years, Contra eked out an annualized gain of 2%, again four points per year better than the S&P index. Danoff says he starts with the assumption that over time stocks will reflect company earnings. So he searches for businesses that he believes will grow faster than the market over the next three to five years. Typically, these will be innovative companies, market leaders with the highest returns on capital in their industries. "I'm willing to pay a fair price for really excellent companies," he says. This year earnings growth will be "very dear," Danoff says, so he's gravitating toward defensive stocks in such areas as health care and consumer necessities. For example, he likes Coca-Cola (KO) for its ability to generate strong free cash flow and its vital position in foreign markets -- particularly developing nations. Advertisement Danoff says traditional blue chips such as Coca-Cola and Johnson & Johnson (JNJ) have been relatively under-owned in the market because hedge funds avoided them. "What's really intriguing is that if you look over the last ten years, most blue-chip stocks just bounced around while their earnings doubled," he says. Low-Priced Stock (FLPSX) is an idiosyncratic fund with a dazzling record since Tillinghast launched it in December 1989. The fund has returned an annualized 13% since its inception, an average of five points per year better than Morningstar's benchmark of midsize companies. Tillinghast concedes that Low-Priced -- defined nowadays as stocks that sell for less than $35 a share (it was $15 when the fund started) -- is "a bit of a gimmick." He invests in companies of all sizes, domestic and foreign, as long as the price is below the $35 threshold. Tillinghast is an astute stock picker with an encyclopedic grasp of numbers. He says he prefers businesses with strong recurring revenues, contract backlogs and consistent profitability. For instance, he favors software companies, such as Oracle (ORCL), with its consistent revenue stream, over companies that make technology hardware. In retail, he likes Bed Bath & Beyond (BBBY) because its sells basic products that customers buy with some frequency-such as sheets, towels and coffee pots -- rather than luxury items. Advertisement In today's fractured capital markets, Tillinghast is paying more than the usual attention to balance sheets. He's looking for companies that "don't have to worry about banks pulling their credit lines, companies that generate good free cash flows." Once he buys stocks, Tillinghast stays with them for three to four years, on average. Both of these funds make fine long-term holdings. Contrafund bears a 0.89% annual fee. Low-Priced Stock, which is pretty much a small- and mid-cap fund with a value bent, has a 0.98% annual price tag.