Emma Wall: Hello and welcome to the Morningstar Series '3 Stock Tips.' I'm Emma Wall and here with today is Rebecca Edelman of the Neptune US Income Fund. Hello, Rebecca.
Rebecca Edelman: Hi, Emma.
Wall: So, what's your first stock tip?
Edelman: My first stock tip is a company called Limited Brands and this is a retailer. It owns Victoria's Secret and another concept called Bath & Body Works, and these two concepts, Victoria's Secret is obviously the intimate apparel, are both market leading. They've got 25% market share approximately in the U.S. market.
They are also two very strong brands. Customers love them. They've got good customer loyalty. That gives them pricing power. That gives them a very solid base domestic business. But what's really exciting about Limited Brands at the moment is they are expanding into new markets. So they are launching swimwear, they are launching activewear, this range called PINK, which is targeted to the younger audience. So, again, we see there's big growth opportunities domestically in the U.S. retail market.
Longer-term, however, they're expanding internationally as well and that's the really exciting long-term part of the Limited Brands story. They've got about four stores now here in the U.K. They're looking at expanding in the Middle East, looking at Hong Kong. It's a very underpenetrated market and with such a strong brand like Victoria's Secret, we think it's going to do well in the future.
Wall: What's the risk then, because some retailers as we saw, although slightly different market, but Tesco overstretching itself with trying to expand globally. Is that a risk?
Edelman: Well, I think that's very interesting, because the difference between, say, Tesco and Limited Brands, is Limited Brands is being very cautious with their international expansion. They're not just going opening up store here, there and everywhere. They're being very selective with locations, very selective with markets and really going at a very measured pace and we like this kind of careful management.
Wall: What's your second stock tip?
Edelman: My second stock tip is a company called Las Vegas Sands, so a casino operator, but it's not about Las Vegas, it's all about Macau [Chinese island off the coast of Hong Kong]. So, over 50% of their profit comes from Macau. Now, as most of us know, the Macau market is booming for whatever reason, Chinese love to gamble. So, the demand is so strong, but at the same time, you've got a very limited space, only in Macau a Chinese is allowed to gamble.
So, just to give you an example, last week, it was golden week in China and in their property there they had 1.5 million people going through that property in a week, which is a quite phenomenal number of people gambling just in their one property.
At the same time, they're opening up new properties. They've got a new Parisian resort with its own replica of Eiffel Tower which they're currently building in Macau and then they are also looking in the future of properties potentially in Japan, even in Spain we might see a EuroVegas at some point in the future.
So, it's a great, great, growth story, but at the same time, it's a company that's committed to returning cash back to shareholders. So, it pays a nice regular dividend which is growing, growing at very healthy rate, but also we expect them to pay a special dividend in the fourth quarter of this quarter which will give them a yield of around 7%; so a really nice growth and income story.
Wall: Is that sustainable given how small Macau is?
Edelman: Well, the amazing thing is, is because the Macau is so small and the demand is so strong, they have so much pricing power. So, year-on-year, they're able to put up the minimum bets on tables. The Chinese consumer, as I said, just loves to gamble and they're willing to pay more and more to do that. So, it gives them just this great pricing power as well as the other properties which will give them that volume growth in the future.
Wall: What's your third stock tip?
Edelman: My third stock tip is a company called CME, so Chicago Mercantile Exchange. It's a financial company. We like the financial sector at the moment. But it's a business where traders will trade options and swaps and future contracts, but the big secular growth driver for this is traders because of regulation are increasingly having to trade on an exchange rather than just over the counter transaction. So, a lot of volume is moving on to their exchange. At the same time, it's a very asset light business. So, they generate a lot of cash flow and again, they return that cash flow back to shareholders in a meaningful way. So, long secular drivers as well as a nice income story.
Wall: A lot of people are nervous of financials though. What are the risks with this stock?
Edelman: Well, I think the biggest risk is, what's happening in terms of financial volume; so the amount of equities that are being traded, the amount of fixed income that's being traded. Volumes have been pretty low since the financial crisis. But actually in the last few months as you've seen the health in equity markets, as you've seen stock price rise, you've actually seen volume start to pick up again and again. And you have to remember that this is a very profitable business. In fact, they make a 90% incremental margin for every extra bit of volume that's traded on their exchange. So, really you've got nice leverage into rising financial market. So, we actually think this is a bull point for the stock at the moment.
Wall: Rebecca, thank you very much.
Edelman: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
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