Welcome to the Morningstar series, "3 Stock Picks." I'm Holly Black. With me is Dean Tenerelli.
He is manager of the T. Rowe Price European Equity Fund. Hello.
Good morning. So, you've got for us today three stock picks
for Europe for 2020. Where would you like to start?
Okay. The first one I'll start with is Prysmian, which is an Italian cable company, which is
really a global business. Cable sounds very, very boring. But as with most of what I do,
we really do look for companies with good barriers to entry and moats and Prysmian supplies
cables across different industries, a lot of which are very high tech, telecoms and
energy, high voltage cables, this kind of thing, underground, undersea cables. And the
company had a bit of a glitch last year with some quality issues in its cables and the
stock was sold off a lot. That combined with a slowdown in the industrial segment also
caused the stock to get very sold off. So, it's very, very cheap now, trading on 11.5
times P/E, 8.5% free cash flow yield. And I think it's a screaming buy. We have a decent
size position in it. We've increased the position through the year. And it's a high conviction
idea for me. Is the fact that it's in Italy also playing
against it as well, because that's quite an unloved area for investors?
It is and at times it has penalized the company a bit, but really the percentage of revenues
in Italy is something like 2% or 3%. So, it's not an economic concern for the company, but
sentiment sometimes get influenced. But that's an opportunity because the company will deliver
its earnings. Super. Okay. What's stock number two?
Stock number two is a very different one. I'll choose Great Portland Estates, which
is a property company in the UK. You've just sent alarm bells screaming.
It's true. Property has been – especially, since Brexit there's been a lot of worry and
in fact, Brexit has caused the slowdown in new capacity or new supply coming on stream
in UK property, which is precisely the opportunity because Great Portland has a great positioned
estate which is located in and around Oxford Circus, mostly and you're seeing a lot of
investment and demand there from high-tech companies like Facebook and Google that are
taking up a lot of office space. So, actually, their rental increases we expect to be 4%
to 5% going forward which doesn't seem like a company with any sort of problem or a slowdown,
does it? And it's trading at book value. And the other interesting part is that they're
beginning to also expand their supply slightly in central London. So, we're going to start
to see a bit of growth in the assets that the company have. It's top, top management,
and they have a very good portfolio of businesses. So, I really like the stock.
And is it office space you particularly like, because obviously some property funds are
more focused on retail or industrials? Yeah, for me, well, office is much, much preferable
to retail. So, they don't do a lot of retail. And so, you're not having that sort of malaise
of how the internet is affecting the business and stuff. So, it's pure office, so it's pure
economic demand kind of thing in many different segments.
Super. Okay. And our final stock? Final one is a very high tech, a company called
Thales which is a defense contractor and they make systems for aerospace, for airplanes,
for cockpits, both private and government defense, communication systems, very high-tech
satellites, very high return on capital employed. You're talking 30% type business. They had
a problem this year in their satellite business. And in general, commercial satellites have
suffered a bit with different problems in the industry. And so, they've had fewer launches
than they had hoped for and fewer sales. That caused the stock to come down. They don't
generally miss numbers, and they did this year. But we're very secure that, even starting
next year that they can meet their 3% to 5% revenue growth targets, again, with very high
profitability. Super barriers to entry based on their top technology. So, I like this stock
a lot. It seems like you're looking for shares that
have fallen out of favor that you think are due to turnaround. Is that a bit of a theme
in the portfolio? I think it is. I think partly it depends – it's
a function of also where we are in the markets, like a lot of stuff has been bid up, a lot
of stocks are overvalued. With the backdrop of QE and a lot of liquidity in the market,
you're finding that all of the equity markets are pushed up. So, I think you really need
to look for areas where things have come off for a certain reason. And that's where you're
finding value. I mean, we're sticklers for DCF, for evaluation. We don't want to buy
stuff that's expensive. So, yeah, I think at this point in time, I am seeing a lot of
stories like that. Well, thank you so much for your time.
Thank you. And thanks for joining us.