Fidelity Special Sits 3 Stock Picks

Alex Wright, manager of the Fidelity Special Situations fund, shares his three stock picks for value investors

Emma Wall 19 September, 2018 | 7:34AM
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Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Alex Wright, Manager of the Fidelity Special Situations Fund, to give his three stock picks.

Hi, Alex.

Alex Wright: Hi.

Wall: So, what's the first stock you'd like to highlight today?

Wright: My first stock pick is Pearson (PSON). It's a name that we have built up over about an 18-month period and it's something I'm still very excited about. I think it's one of the few stocks where there's a massive gap between sort of the reality of what the company is and the perception of what it is. So, there's a huge amount of negativity out there. A lot of the people on the sell side or brokerage houses have a sell rating on the stock, quite a lot of short interest from hedge funds. And that's because there's flux in the marketplace.

There's a big analogue to digital transmission going on and I think Pearson is doing well navigating that and that will result in a much more predictable, much steadier and a much higher-margin business over time. And they are the global market leader in education, a market which grows structurally. So, I think, that could be a stock which would attract a very high multiple, like a technology company would and it's only trading on about 15 times earnings.

Now, the reason people don't like it is that is a painful transition. It's costly. There's been a lot of investment done. And also, cyclically, things have been bad. So, people don't go into education when the economy is strong. And the economy has been extremely strong, particularly in the core US market. But now, that market is reaching full employment, I think that cyclical drag drops away and that structural story can really show out over time. So, very excited about that idea.

Wall: And what's the second stock pick?

Wright: The second stock I wanted to talk about is Phoenix Group (PHNX). It's an insurance company. It's quite unusual in that it primarily doesn't write new business. It's actually a closed book consolidator in the life space. So, a lot of people have bought annuities over time and have insurance products that are in big back books. And Phoenix, what they are doing, because rules have changed over time, Solvency II has come in, it made it harder for businesses which aren't at scale in that industry is they are consolidating up those back books of largely closed business. And they have done a very large acquisition over the summer from Standard Life Aberdeen, taking their back book away. So, again, transforming that business. And I think that's a really good acquisition.

So, it's the biggest deal that they've ever done. It's a business where there's an awful lot of integration and cost to squeeze out of that book, because it is so large compared to their base business and I think that really gives you much more visibility on what is a 7% dividend yield. So, I think, a very attractive valuation in a business which is largely already written with a lot of cost cuts to come from that new acquisition.

Wall: Because it's a closed business, does that mean it has a shelf life as a stock? I mean, presumably, it's not one you're going to be holding in 20 years' time?

Wright: You're right. So, this company over 20 years if they don't do any further deals, you're basically going to get all the cash returned to you. So, there won't really be a company. So, it's interesting. There's a lot of certainty of those cash flows. But obviously, the cash flows will run out over time. So, you wouldn't expect a 3%, 4% dividend yield like the market. But actually, because you are getting all that cash back, I think that that level of dividend yield is very attractive.

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

Wright: The third stock I wanted to talk about is C&C Group (CCR), a more mid-cap idea from the fund that I've increased the position in dramatically recently. They recently bought the Matthew Clark assets. They bought those out of administration after Conviviality went bankrupt over the weekend near Easter. I think that is a very good deal as generally deals from administration are. It's an asset that they tried to buy but were outbid substantially a number of years before by Conviviality. And I think there's a lot synergy for them because they already have a big distribution business in the U.K. but also a very large one in Scotland and Ireland. So, their purchasing is dramatically increased. Also, they have got their own side brands that they can put through that and I think it really transforms the business and you are only paying about 12 times earnings for that business. So, a low multiple for something that's dramatically improved in quality.

Wall: Alex, thank you very much.

Wright: Thank you.

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.

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Emma Wall  is former Senior International Editor for Morningstar