Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by Chris Morrison,
Manager of the GAM UK Diversified Fund, to give his three stock picks.
Hi, Chris.
Hello.
So, what's the first stock today?
I thought of Morrison today, the super market chain.
Your namesake and also a stock that has been in the news this week because they are stripping
assets, aren't they? They are closing some stores. So, why do you think it's a good stock?
Yeah, that's part of our thesis really. Morrison has done very, very badly. It's been caught
up with the other food retailers facing price competition from the discounters, but also
Morrison, in a sense, created a road for its own back. It move away from what it is very
good at, its traditional no frills type supermarket. To trying to compete with Tesco Morrison is
opening up convenience and going online and we see that as the opportunity now as they
move back to their roots and what they're good at. We feel there is an opportunity.
And they are not threatened by the discounter supermarkets that we hear increasing amounts
of news about?
They are definitely threatened, but you have to marry that up with the valuation when you
look at the stock. So, we feel the changes to the current – the new management team
have done a very material. They have completely changed the Board; put a lot more staff into
shops and transformed the financials as well from a cash point of view, whilst investing
in prices to try and compete to a degree with the discounters. So, it looks interesting
at this stage, definitely not out of the woods yet, but yeah, interesting.
What's the second stock today?
Second one is FirstGroup, the bus and rail operator in both the U.K. and the U.S.
Why do you like this stock?
It's a bit like Morrison. It sits in the recovery camp as well. It bought a very expensive – or
paid a lot of money for a company in the U.S. just before the crisis and because of that
it geared up and it really restricted cash flows from then on and it's been in a period
where it's underinvested in the rest of the business and it's really only now where the
new management team seems to have a grip on things. They announced a rights issue, so
they reset the financial position of the company and they are really concentrating on turning
around the two bus divisions. If they can do that, if they can just some improvement,
which we're starting to see, then the shares look very attractively valued at this level.
I suppose those types of businesses are very reliant on the domestic recovery in the country
that they are in because how much of their business is reliant on government contracts
– I should say that U.S. and U.K. actually doing very well, so that may well be a positive
thing?
Yeah, it's a balanced mix. Political interference makes a huge difference. So, for example,
take Manchester where the Mayor or proposed Mayor is going to take more control of the
network, the bus network, so that will automatically have an impact on FirstGroup. It makes the
outlook more uncertain indeed, but that's something you definitely have to contest with
one of these companies. It actually goes back to the rail franchises they had in the U.K.
which very low margin business, but act as a cash cow. So because of that it almost masks
poorly performing areas because you just had a lots of cash coming up from this business.
And presumably inflation linked as well?
Yes, indeed. Yeah, exactly. So, it's a good thing for them to have, but they have lost
those now. So because of that they have really had to concentrate on what they are good at
and reset themselves.
What's the third and final stock?
Final one is, Centrica, the utility company here in the U.K.
Three pretty punchy stocks I have to say for you today?
Yes, the first two are in the fund, this one isn't. It's one where we are doing more work
on and quite interested in, but that is the style of the portfolio to a degree. We have
a recovery bias, but we have balanced that in more recent times. We have sort of more
compounded like stocks if you like.
Centrica is another interesting one, like you say. It's got upstream assets, so exploration
assets and rigs in the North Sea, plus it's got downstream operations, which is British
Gas brand, which is us paying the bill. Both are being impacted by falling commodity prices
and at the same time, negative sentiment around the British Gas brand and how much consumers
are having to pay for their bills. But in a sense Centrica had their crisis early which
we feel that they can emerge from quicker than the rest.
Chris, thank you very much.
Thank you.
This is Emma Wall for Morningstar. Thank you for watching.