3 Stock Picks in the Undervalued UK Market

Rachel Winter from Killik & Co tells Emma Wall that UK stocks are unloved and undervalued - and picks three domestic equities for investors to consider

Emma Wall 13 February, 2019 | 10:27AM
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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 Rachel Winter from Killik & Co.

Hi, Rachel.

Rachel Winter: Good morning, Emma.

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

Winter: Well, this week, we started to have a look at UK equities. Clearly, they have been quite out of favour for quite some time with good reason. People have been concerned about Brexit; they have been concerned about Jeremy Corbyn. But there has been quite a large sell-off in UK stocks and now we do think some of them are starting to look attractive. So, the FTSE 100 index, for example, now has a yield over 5%. So, I think, that does that show that there are some areas of real value in the FTSE 100 index.

So, first of all, we've been looking at Diageo (DGE), huge international drinks giant, big focus on spirits and this is a company that we think will continue to grow very strongly. So, in the UK, Diageo has a very large presence, particularly in the gin market which is doing really, really well over here. Gordon's is still the most popular gin in the UK and that's one that Diageo owns. Also, Tanqueray, we are seeing very significant levels of growth there and it really doesn't feel as though this kind of gin revolution is going to stop anytime soon. Also, they’ve got a presence in tequila which is getting more popular and also, they do have quite a large presence in the US as well. Also, emerging markets, I think there is a bit of a move there to spirits. So, many areas around the world in which Diageo is expanding.

Wall: Now, some drinks firms have dipped their toe into emerging markets and been burnt because tastes differ around the world. How successful has Diageo been in breaking the emerging markets?

Winter: So far, I think, very successful. Spirits are really starting to take off there. I think, perhaps, western tastes are starting to take off there as well. But Diageo is so big, it just has such a huge range of different spirits and different brands within each category of spirits that I really do think they have something for everyone. For example, they have been using lots of celebrity endorsements and you might have seen last year they purchased George Clooney's tequila brand Casamigos. That's doing very well the world over. And I think the fact that he was the face of it has actually helped to endorse that across emerging markets as well.

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

Winter: The second one is another FTSE 100 giant. It's Legal & General (LGEN) which is a major financial services company. We like this because it's so exposed to retirement products. It's involved in pensions. It's a huge investment manager with nearly a trillion pounds worth of assets under management and also, it's very large in the annuity space. Now, we like the fact that it's so exposed to pension because people are living longer, and they are having to take more responsibility for their own retirement. Nowadays, people have to put a certain percentage of their earnings into a pension. They are going to have to look after that themselves and Legal & General, I think, will benefit from the growth in this particular space.

Wall: And what's the third stock pick?

Winter: The third stock is FTSE 250, it's still UK-based and it's Cineworld (CINE). So, this is now, it's the second-largest cinema chain in the world. Until last year, it was predominantly focused in the UK and it did have a presence in Eastern Europe. But last year, it made a huge acquisition. It bought Regal Entertainment which was a US cinema chain, and that has allowed the business to expand significantly overseas. And I think at the time there was some real concern about the huge size of this acquisition. But the evidence we've seen so far does imply that so far it is going very well. They have seen a lot of cost synergies in the acquisition that they made.

And what makes us particularly positive is the fact that we have got a huge number of very exciting films coming out over the next couple of years. So, for example, we've got these Disney remakes, we've got the real-life version of the Lion King, we've got Mulan, we've got Aladdin. We've also got some more Marvel films. We've got another Star Wars film. So, I think, there is quite a lot for the cinema industry to look forward to.

Wall: And do people still go to the cinema? I would have thought with the rise of home entertainment services such as Netflix that there simply just weren't enough cinema goers to support this kind of stock?

Winter: There are. And I agree, it's quite surprising. You would have thought that perhaps cinemas would have lost out to things like Netflix. But at the moment, particularly in the US we are seeing that people really do enjoy the experience of going to the cinema. And I think Cineworld has really taken advantage of that by really upgrading a lot of its screens, it has invested quite heavily in 3D and IMAX screens and I think people are willing to pay to have that experience which is far above what you can get from sitting on your sofa at home watching Netflix on your laptop.

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.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Cineworld Group PLC  
Diageo PLC2,986.00 GBX0.03Rating
Legal & General Group PLC242.00 GBX0.41

About Author

Emma Wall  is former Senior International Editor for Morningstar

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