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3 Stocks That Aren't What You Think

VIDEO: Rachel Winter, investment director at Kilik & Co, says some companies aren't what you think. And why Tesco is a "buy" despite its boss stepping down

Holly Black 3 October, 2019 | 10:19AM
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Holly Black: Welcome to the Morningstar Series "3 Stock Picks". I'm Holly Black with me is Rachel Winter, she's Investment Director at Killik & Co. Hello.

Rachel Winter: Good morning Holly.

Black: We're talking about three big brands today, where would you like to start?

Winter: Yes, so three big brands. And these are three companies that we think have quite successfully changed themselves over the last few years. And we don't think any of these companies are what people consider them to be. So, let's start with Philips.

Black: Very intriguing introduction.

Winter: It is, isn't it? Just trying to make it interesting. So, Philips, I think a lot of people think of Philips as a TV and lighting company. But actually, they've got rid of both of those businesses. And now the company is about 88% focused on health care. And so, there are two particular areas that we like. One is their diagnostics business. So, they are a market leader in ultrasound, x-rays and MRI scans. And we think that's going to be a growing area, as people start to try and diagnose certain illnesses more early, so that they can be treated more effectively. So, diagnostics we're very keen on. The other area is personal care. So, Philips is really strong in the electric toothbrush market, which might sound like quite a niche market. But actually, in the UK, and the US, it's very popular indeed. People are consistently upgrading their toothbrushes, and we've got all these Bluetooth ones that can tell you what parts of your tooth you've missed. So, those are becoming very popular, and they're quite expensive. The margins quite high. But also in emerging markets, there are hardly any electric toothbrushes. And we think it's a very, very large growth area indeed.

Black: But that's quite strange that it's got rid of the whole business it was known for. At the time, does that make it a bit of a dicey situation for investors?

Winter: Not at all, I think we're seeing a lot of companies now are trying to go back to having one particular core area of business where they are an expert. So, I think to have lots of different areas of businesses don't really fit together. So, to have TVs and lighting and also a bit of health care. I think it was really quite a strange mix. So, to get rid of two and to focus on one area as your core area of business, I think does make a lot of sense.

Black: Okay. Now I'm excited for this next stock, because there was some big news about this yesterday.

Winter: Yes, we've been looking at Tesco. So, it's had quite a rough few years. Starting with back in 2014. We had that huge accounting scandal when Tesco was criticised for finding a £250 million black hole in its finances.

Black: As you do

Winter: As you do, it happens to all of us, not me. So, they've been through quite a tough few years. And I think around that time, there was a lot of focus on the company they were criticized for treating their suppliers poorly, and perhaps trying to spread themselves too thin. But since then, they've had Drastic Dave, their chief executive coming in. And he really has turned the business around. So, he's got rid of a lot of non-core businesses. He's bought Booker, which was a wholesaler, and I think that's been quite a transformational acquisition. And he's allowed Tesco to focus on its core business of food. And that's allowed them to cut their prices and to compete with the discounters. So, we now think that Tesco is in a much stronger place than it was in the five years ago.

Black: But Drastic Dave, drastically is leaving

Winter: He is.

Black: Does that change the investment case?

Winter: It's a mild concern, I will admit. So, he has been a fantastic chief executive. And he has really turned the businesses around, but I think certain chief executives are better at certain things. He's clearly a very good person for big transition and for turning things around. But now that work has been done. So now I do think it probably is a good time to leave, and to get someone in who's better at running a business more consistently, where less drastic work is required. So, I do understand why he's left, but we are obviously waiting very easily to find out who will be taking his place.

Black: Okay, and what is our final stock today.

Winter: Final one is McDonald's. And so, another one that I think is perhaps a little bit misunderstood. So, I think a lot of people think McDonald's is perhaps quite unethical, it focuses on very poor quality food, and it's very unhealthy. Now, I'm not going to try and tell you that McDonald's is now incredibly healthy. But I think it has made some very big steps in the right directions. So, it is trying to source food more ethically, it's trying to focus on more recyclable packaging. And it is trying to focus on higher quality foods. For example, we've got all these adverts about the chicken nuggets saying that they are no longer made of various unappealing different parts of the chicken, they're actually now made of chicken meat. So, I think McDonald's has really turned itself around in that way. And they've also done a few other things to try and make the business grow more quickly. So, for example, moving more into digital, say when you go into a store, now you can order on one of those big digital kiosks. You can order on your phone and get delivery. And also, they've put a huge amount of focus into drive through stores. So that's incredibly popular in the US And as they expand those drive through stores, they have seen a big increase in sales

Black: And we're all getting more health conscious now, so is fast food still a viable business, is it still a popular area?

Winter: Depends on what food is being served. So, I think McDonald's really has tried to make a move towards offering slightly more healthy options. So, you have got a few salads there now. You can have water, you don't have to have a Coca Cola. And they have tried to lower the fat and salt content of a lot of their main offerings. So, I think they really are moving in the right direction. And something else actually I forgot to mention very big on vegan food. So that's a very big trend. And a lot of people are moving towards that for health reasons because they want to eat less meat. And I think McDonald's has taken quite big steps in serving that audience.

Black: Super. Well, thank you so much for your time.

Winter: You're welcome.

Black: And thanks for joining us.

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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Holly Black  is Senior Editor, Morningstar.co.uk