3 Stock Picks for the New Year

Killik & Co's Rachel Winter shares her three stock picks for January 2019. A mix of value bets and dependable equities

Emma Wall 9 January, 2019 | 12:23AM

 

 

Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and here with me today to give her three stock picks is Killik and Co's Rachel Winter.

Hello, and Happy New Year, Rachel.

Rachel Winter: Happy New Year.

Wall: And what's the first stock pick of the new year?

Winter: Well, clearly, the end of last year was quite difficult and we did have a lot of market volatility, a lot of very weak market indices. So, we've been looking for two things. We've been looking for stocks that have come down quite a lot in value and now look very attractive and also, stocks that have held up quite well and haven't been that volatile because they just do feel a bit safer and a bit more defensive.

So, first of all, let's look at one that's come down a lot. And for us, one that's done that is Airbus (AIR). So, that's off about 20% since its record highs. And Airbus, it really acts as a duopoly with Boeing. So, there are really only two major aircraft manufacturers in the world, Airbus and Boeing. Because of that they really do have a lot of control over pricing. There's a lot of demand for what they do. And in fact, Airbus has got enough business to take care of it for the next nine years. So, people do tend to order aircraft very far in advance. And also, we just are seeing a lot of increase in air travel across the whole world, particularly in Asia. So, we do think there will be quite an increase in future demand for what Airbus does.

Wall: Now, obviously, that stock has come down quite a lot, 20%. How can you be assured with the stock like that that it's not a value trap and is just good value?

Winter: I think you got to look at what the wider market has done. So, wider market is off at least 10%. So, Airbus hasn't done a huge amount more than that. And in the recent market volatility, we did see the industrial sector, which Airbus is in, that was hit particularly hard and I think that was just a bit of concern about potentially the trade war between the US and China and also, rising interest rates because these companies do sometimes need to borrow quite a bit of money. So, those are probably the reasons. But for us, they are not major concerns and at these levels we do think the stock looks very attractive.

Wall: And what's the second stock pick today?

Winter: So, the second stock is one that has been a bit more resilient. So, this is a company called Medtronic (MDT). It's American and it's a medical device manufacturer. In fact, it's one of the largest ones in the world. And actually, this ties in quite nicely with the big announcement yesterday that came out from the NHS. So, they have announced their new budget plans on how they are going to spend their new £20 billion of budgets. And what they have said is they want to spend more money on preventing illness rather than curing it when it happens.

So, rather than just giving people loads of expensive drugs when they are sick or letting them get so sick, they need to go to hospital and then it becomes very expensive to treat them, I think the NHS is going to work more towards preventing illness from happening and that will require more medical devices which is what Medtronic makes. And an example is diabetes. So, rather than giving people drugs or allowing them to have to spend time in hospitals because their diabetes has got so bad, if you can give them a glucose monitor that they can use on an ongoing basis, that will help them to manage the condition and hopefully you can avoid any hospital stays and over the long term the NHS should save money. So, that's really where we think healthcare is going in the UK and also globally as well.

Wall: And what's the third and final stock pick?

Winter: Third one is another one that's been quite resilient and that's American Water Works (AWK). So, as you can tell by the name, it's another American company. It's held up very well in the recent market volatility. And it's the largest water and waste water company in the US So, what it does is, it manages a big collection of pipes and waste water treatment works. And how it works in the US is, each utility company has what's called a regulated asset base. So, they have to work out the value of the regulated assets, i.e., all of their pipes, their water pipe networks, waste water treatment facilities and they are allowed by the regulator to make a specific return on the value of those assets and that return in the US is 9.5%. So, this company is allowed to make a return of 9.5% every year. And for us, that's very attractive, that's very high for a company that's as relatively safe as a utility business.

Wall: Now, you and I have talked in the past about the UK utility sector. It's a sector that is vulnerable to political risk, in particular, a Corbyn government. With US utilities is politics a risk, a concern? Could Trump influence the sector?

Winter: I think Trump probably poses a benefit actually, because he is so keen to spend more money on infrastructure. He hasn't yet been able to do that. But if he does, I think that would be good for American Water Works. And even without him, they are still increasing the size of their regulated base every year and that's enabling them to make more money every year. So, for us, this is quite a good alternative to a UK utility company.

Wall: Rachel, thank you very much.

Winter: You're welcome.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Airbus SE116.34 EUR2.02
American Water Works Co Inc107.20 USD0.48
Medtronic PLC91.07 USD0.50

About Author

Emma Wall

Emma Wall  is Senior International Editor for Morningstar

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