Welcome to the Morningstar series, "3 Stock Picks." I'm Holly Black. With me is Alex Wright.
He is Manager of the Fidelity Special Situations Fund.
Hello. Hi.
So, you've got three stocks for us that you like at the moment. Where would you like to
start? So, the first two I wanted to talk about play
into the infrastructure sector. So, I think this is an area that most people globally
think there needs to be more investment in, particularly in the developed world. And I'd
agree with that. If you look at infrastructure spend in the U.K. or the U.S. versus GDP compared
to long-term averages, it's well below that level. And this really benefits two stocks
that we've got in big size in the fund, CRH and John Laing.
So, CRH, I think is really interesting, because it's primarily a U.S. facing company, 65%
of revenues from the U.S. and aggregates is its main business. That's the rocks that go
into building, particularly around road building. So, you're seeing not just demand increase,
but margins increase as they have a big firm-wide efficiency programme. And therefore, I think
it's in a sector where there's positive change and a company where there's positive change.
Okay. And you think John Laing plays into this as well?
Yeah. So, Jones Laing is a very different company. Many people regard it as an infrastructure
fund, but that's actually incorrect. The advantage John Laing has is, while it has those infrastructure
assets and largely trades at the book value of those, which is in line with peers, what
it also has is a fund management company that creates new assets. So, actually, they will
go in and they will contract on new road extensions, new rail lines, renewable energy assets and
they will bring in the construction partner, the financing partner and actually create
those assets. So, they can grow the size of their businesses as well and then sell those
assets on a profit. So, it's much better than just the fund itself. Particularly, their
pipeline now is very skewed to the U.S. where there's a real developing market here for
bringing private sector funding into these areas. And so, I think actually, you've got
that good downside protection from the existing portfolio, but also substantial growth and
you're not having to pay for that. So, that's why John Laing is also quite a big position
for me. Okay. And we're moving on from infrastructure
for our final stock, aren't we? Yeah. So, I also wanted to talk about a UK
domestic name. So, I think this is an area that is interesting where the fund is overweight,
particularly with the consumer in somewhat better shape than it's been over the last
couple of years. I do think there's some select opportunities. One we've got, which is about
a 1% position, so kind of a medium-sized position for the fund is Frasers Group. You might not
recognise that name because that's new. And it used to be called Sports Direct until December
last year. Why have they rebranded?
So, that reflects the fact that 12 months ago they bought House of Fraser Group. That
was a very troubled business. They bought out of administration, and they have done
a real transformation to that business. So, they started closing stores, they've been
reducing cost, changing the brand mix of that business. And they've done a really good turnaround
job. So, it's not done. That business is still only about breakeven. But that's much better
than the heavily loss-making position. While the core sports business continues to go from
strength to strength, and indeed, actually, the stock pretty much doubled last year, but
I think there's quite a lot further to go because that was from a very low base.
And again, this is a stock that 12, 18 months ago, people really wouldn't have considered
investing in, didn't really understand the strategy of all the purchases they were making.
House of Fraser, Jack Wills, Agent Provocateur, Game group. There's been a huge change in
that company. And the name change reflects the fact that really, this is now a holding
group of a number of different retailers, not just the core sports business, and I think
that gives them a real second leg to growth now in an environment where lots of other
retailers are closing space and reducing capacity, that allows those that are left to get better
returns. Thank you so much for your time.
Thank you. And thanks for joining us.