3 Stocks Picks Which Have Slumped in the Downturn

These three companies have seen their share price fall in recent volatility - but this has left them undervalued, says Killik & Co's Rachel Winter

Emma Wall 7 November, 2018 | 2:01PM
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Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and joining me today to give her three stock picks is Killik and Co's, Rachel Winter.

Hi, Rachel.

Rachel Winter: Hi Emma.

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

Winter: Well, clearly, it's been quite a tough few weeks for markets. So, we have been on the lookout for some stocks that we think are oversold. And so the first one we've looked at is Standard Chartered (STAN). So, it's a U.K. listed bank, but it's very much emerging markets and Asia focused. So, if I get exposure to Asia and Africa and we think that's very good growth there. And just looking at Standard Chartered in terms of the share price, you know it's come down more than 50% since 2013 and in that time we have seen most other banks doing quite well. And it is right that Standard Chartered has come down a bit. It has really struggled.

It was trying to expand after the financial crisis when many banks were really trying to rein in what they were doing. It had exposure to risky areas such as diamonds, for example. It was very poorly capitalised. Then about three years ago, they had a new Chief Executive and he's really tried to derisk the bank. He's sold off the risky operations. He's gone through with the rights issue, so now the bank is much more well capitalized. And now we think the bank is looking like the share price is low enough to make it a good investment.

Wall: Now you've mentioned Asia there and the stocks exposed to Asia as being a positive for growth over the long-term. But at the moment, Asia and in particular China is marred by the U.S. trade war. Is that the constraint for Standard Chartered?

Winter: We do think it's a good thing in the long run, so rates of growth in Asia, particularly for financial services are well ahead of what we have here in the developed world. And we say that, the first thing people tend to buy is food and shelter and after that they consider financial services. So, as the middle class in Asia and Africa grows that should be very good for financial services. So, it's definitely a positive, but you are right in saying, it is a risk, particularly with China starting to slow down a bit. So, it could potentially be volatile. But now we think that Standard Chartered is trading on a price-to-earnings ratio of about 8.6 and that to us is low enough to make that risk worth taking.

Wall: And what's the second stock pick?

Winter: Second one is DS Smith (SMDS). So, this is a FTSE 100 packaging company. Now packaging stocks have been hit quite hard recently because of concerns about a crackdown on single-use plastic. So, we feel that investors and consumers are becoming more environmentally aware and they've really tried to come out of companies that are producing materials that can't be recycled. But actually for DS Smith, we think they are quiet environmentally sustainable. So, most of their products are made of cardboards, their corrugated cardboard, rather than plastic.

They do have a plastics division, but that doesn't focus on single-use plastics, it makes predominantly recyclable plastics. And also they're the first company in the U.K. to make a plant that can recycle coffee cups. So, here in the U.K., we use probably 4,000 disposable coffee cups every minute and they can't be recycled because it's quite difficult to separate the paper cup from the plastic lining. So, the plastic lining is there to make the cup waterproof. But DS Smith has developed a huge plant in the southeast of the U.K. and that can separate those two materials. And it's got capacity to recycle every single coffee cup that is used in the U.K. So, for me that is a massive plus and it's really a moral reason to invest in the story.

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

Winter: Third one is a company called ASML (ASML), which is the global leader in photolithography machines, and I'll tell you what that is. And so if you imagine that as things become more technologically advanced, more and more devices will be connected to the internet. If you want to connect to the internet, you need a chip, inside that chip you have a semiconductor. And if chips want to get smaller and smaller, then we need semiconductors, they're going to get smaller and smaller. But the issue is that you have to draw a circuit on each semiconductor and as those semiconductors get smaller, it becomes very difficult to do that. So, what ASML have done is they've developed machines that can do that using light and that's what photolithography is. And they're the only company that's made machines that can do this on a commercially viable scale. So, we think the opportunity here is huge. We think that business for them will grow, when they'll take market share as chips become more small and more complex. And it's a stock that's sold off quite heavily over the last few weeks. So, at the moment we do think it's oversold.

Wall: Now some of these smaller chip companies, for example, Arm Holdings, have been takeover targets. Is that a consideration for this stock?

Winter: Well, if it happens, I'd say it's a positive because that will push up the share price. But they're not actually producing chips themselves. They're making the machinery that can be used to write on these chips. So, they're relevant to every single chip manufacturer in the world. So, I think they are quite different to buying just a normal chip manufacturer. And one other point, I'll make there has been a little bit of concern recently that chip sales have been slowing down. But I'd like to think that's a short-term blip because we had Samsung's results out yesterday, they're the largest chip manufacturer in the world and they've posted very strong chip sales last night, so that's reassured me.

Wall: Rachel, thank you very much.

Winter: You're welcome.

Wall: This is an 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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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
ASML Holding NV1,004.40 EUR0.59Rating
Smith (DS) PLC421.20 GBX0.10
Standard Chartered PLC723.40 GBX0.00Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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