Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and here with me today is Lee Freeman-Shor, manager of the Old Mutual Global Best Ideas fund. Hello Lee.
Lee Freeman-Shor: Good morning.
Wall: So we're going to have a bit of a U.K. Europe-centric focus. We start with your first stock, what's that?
Freeman-Shor: I've gone for Sports Direct (SPD).
Wall: A stock that everybody will be familiar with because it's a U.K. stock. Why do you like Sports Direct?
Freeman-Shor: Sports Direct is a stock we've held for quite some time and made good money in it. But it's got a fantastic story. I mean, basically, it's a sole survivor on the high street. So if you want to buy a sports kit or some sports equipment, new Real Madrid football shirt maybe, there's pretty much only one place on the U.K. high street you can buy that from and that's Sports Direct. I mean it's literally wiped out the competition.
So in terms of U.K. economy improving, that dovetails quite nicely into the story of Sports Direct, oil prices being lower means that consumers should have more discretionary income to spend. You know so that should lead them into again Sports Direct shops. And the other thing interesting about Sports Direct is that it's actually got a fantastic online presence as well. So, it's not just a U.K. recovery economic growth story, it's actually an international online story as well. And it's just executing fantastically well, kicking off a lot of cash. It's just a fantastic business model.
Wall: I mean you've mentioned there the e-commerce, that's what's been the downfall of so many big high street names, things like Woolworths. Is there a risk that Sports Direct sort of cannibalises itself with its e-commerce model, or is there always going to be a need to have that high street physical presence?
Freeman-Shor: I think in the latter, there is always a need to have a high street physical presence as well as online presence. I mean you and I would know a lot of people still particularly when they are buying clothes, they like to go in the high street and try them on. But I mean the online presence for Sports Direct, I mean it more opens them into other markets, other countries and you know from what I've heard, it isn't cannibalizing people going into the U.K. on the U.K. high streets and buying direct from the shops.
Wall: And what's the second stock today?
Freeman-Shor: The second stock today, also a U.K. stock, Ashtead Group (AHD), but it's actually nothing to do pretty much with the U.K.
Wall: So why do you like this stock?
Freeman-Shor: So Ashtead group is another stock we've held for a long time. But actually it's a stock which is a plant equipment hire company and it derives 85% of its revenues from the USA. So when it was originally purchased many years ago, it was a play on the U.S. economy recovering. Now we're in a stage where the U.S. economy has recovered and it seems to be firing on all cylinders. And Ashtead find itself in a quite attractive situation whereby people are renting more of its equipment, and also, if you look before 2008, people used to buy their own plant equipment for various projects and construction jobs.
Post 2008, credit became harder to get, businesses companies were less willing to take the risk on their balance sheet of buying plant equipment, so they started renting, so that's a structural shift, so you got a cyclical uptake which favors Ashtead, that's why a more structural change. Net-net, you've got a business which has high margins kicking off a lot of cash, doing buybacks, doing dividends, it's just a great story.
Wall: You've mentioned two stock that's Sport Direct and Ashtead that you said you've held for a little while. At what point you say, okay, enough is enough, we are going to crystallise our gains and come out?
Freeman-Shor: I think – I manage a team of managers and for those guys, when the story changes or has hit valuations that are just a bit too toppy, that's when I'd expect them to sell out of these names.
Wall: But you still see sort of upward trajectory for Ashtead?
Freeman-Shor: Definitely, and one thing I'd say is that, on the team each of the managers only has to invest in 10 ideas, 10 stocks, so there is no need for them to have any padding fillings, so the fact that they've still got money in Ashtead and Sports Direct, tells you it's a top 10 idea when their best idea is to make money going forward, so yes we made a lot of money in both names in the past. The fact we still hold it, means we still think there is a long way to run in the future.
Wall: What's the third and final stock?
Freeman-Shor: The third stock I thought I'll discuss is Peugeot (UG). It's a nice play on the European recovery.
Wall: I mean here is a European stock, they are a car maker that everybody will be familiar with, but they will also know the troubles that have happened with Europe and indeed the manufacturing industry has been quite troubled since the global recession? Why do you feel positive against that kind of backdrop?
Freeman-Shor: If you look at Peugeot, I mean it is largely a play on the European recovery. It is the car manufacturer, the auto manufacturer that has the most exposure to Europe. Most of its revenues come from Europe which is big difference to other big global auto companies that really are global and derive the revenues from all over, U.S. or Asia.
But if you look at Peugeot, they've got new CEO on board which came on board last year from rival's Renault. He is going to drive through some cost cutting measures that's good for margins. And then if they do get the tailwind of a European recovery coming through, particularly underpinned by QE, underpinned by low oil prices, then you've got fantastic operating margin story which should drive that share price a long way in the near term. So we're quite bullish on the outlook for Peugeot.
Wall: Lee, thank you very much.
Freeman-Shor: Thank you.
Wall: This is Emma wall for Morningstar. Thank you for watching.
