Holly Cook: Hello and welcome to Morningstar. I'm joined today by Guy Anderson, Co-Manager of the Mercantile Investment Trust (MRC). He's going to give us his three stock picks.
Guy, thanks for joining me.
Guy Anderson: Thank you.
Cook: So you are going to give us three stock picks, three stocks that you are particularly interested in at the moment. What's the first one on your list?
Anderson: So the first one that I'm going to mention is DFS (DFS) which is the furniture retailer. This was a new issue so an IPO that came to the market in February of this year. The reason we find it attractive is because it fits within the overall positive view that we currently have for the U.K. consumer, where we see strong growth in U.K. cash flows, household cash flows. And also we believe it's a company that’s attractively valued relative to its growth prospects and given its strong underlying cash generation.
Cook: So what would perhaps be a sort of risk or something that you might look for that could raise concerns for you with the stock.
Anderson: Concern with this business, because it is a cyclical business. We'd be looking for changes in U.K. consumer confidence as a potential lead indicator to changes in consumer spending.
Cook: Okay. Now let's move on to number two, what's the second stock?
Anderson: So the second stock is Bellway (BWY), which is one of the regional house builders. We particularly like this business because of its flexible capital allocation policy. Whereby they are looking to grow that business if they can generate superior returns. If they can't generate superior returns they'll return that cash to shareholders. They are not going to hold themselves to one or the other. And we think that'll lend itself to better capital allocation through the housing cycle.
Cook: Now obviously this ties in with the consumer theme. But is there sort of fluctuations of the housing market is that – would be one of the concerns that you might be looking out for here.
Anderson: It would be, but when we think about Bellway. The price point at which they tend to operate is relatively low compared to for example if you are looking in the London market. So we think actually the supply and demand dynamics for the end houses that they are building are very positive and there will be increasing growth opportunities at good investment rates.
Cook: Okay. Let’s move on to your third stock then?
Anderson: So the third stock that I was going to talk about is Lookers (LOOK). This is the car distributor in the U.K. So they sell new and used cars and they also perform servicing and maintenance for those sales. We particularly like this at the moment for a couple of reasons. The first is in terms of the overall end markets. The U.K. is experiencing positive growth in car volumes and that’s clearly a key driver.
But also that growth we are experiencing or have experienced for the last few years is feeding through into the second hand market and into the after sales, so the repair side of the business. And that’s giving it a good long term growth potential in this business.
Cook: Again a consumer themed stock here. But what would be a potential red light or warning sign for you?
Anderson: So warning sign on this one would be if we saw a change in behavior of the original equipment manufacturers. So the car manufacturers. So if they stopped trying to push volumes into the U.K. and targeted alternative markets. That could indicate a change in the attractiveness.
Cook: So three stocks that are really sort of helping to encourage and tie in with that consumer strength in the U.K. Thanks for sharing this with us.
Anderson: Thank you.
Cook: For Morningstar I'm Holly Cook. Thanks for watching.
