With more than 100 analysts covering nearly 1,500 companies, we’re able to provide a wide variety of what we believe are attractively priced securities looking across sectors, industries, and geographies. Best Ideas are nominated by analysts and approved by managers in addition to the normal due diligence processes that precede our published research and ratings.
The list may include a broad mix of quality and risk characteristics to meet varying investor needs, including no-, narrow-, and wide-moat companies as well as the full spectrum of uncertainty ratings from low to very high. Most or all of the highlighted stocks will be trading at a discount to our estimate of intrinsic value, indicating improved odds of capital appreciation.
Here, for UK investors, we highlight the three Best Ideas stocks that are domestically-listed.
Kingfisher (KGF)
Kingfisher is Europe's largest home-improvement retail group and the third largest globally behind Lowe's and Home Depot. With 1,202 stores in nine countries in Europe and Asia at the end of fiscal 2014-15, Kingfisher generates annual sales of around £11 billion. Its main retail brands are B&Q and Screwfix in the UK and Castorama and Brico Depot in France. The firm also operates the Koctas brand, a 50% joint venture in Turkey with Koc Holding, and recently sold a majority stake in its China business to Wumei Holdings, a Chinese retailer.
There is a lot for medium-term investors to like about Kingfisher. A decade ago, the company was a multi-category retailer, an ineffective conglomerate of primarily no-moat businesses. Today, it is focused solely on home improvement, and we believe management is building upon some competitive advantages that are likely to provide stronger defences than most traditional retailers possess against the major secular challenges currently facing the industry.
We believe the strategy to sell common products across its banners will allow Kingfisher to finally exploit its scale and help strengthen its economic moat as one of the cost leaders of the industry in Europe.
Diageo (DGE)
The product of a merger between Grand Metropolitan and Guinness in 1997, Diageo is the world's leading producer of branded premium spirits. It also produces and markets beer and wine. Strong intangible assets and a cost advantage are at the heart of Diageo's wide economic moat. While we believe the firm's total alcohol product portfolio is far from complete, it contains 14 of the top 100 global premium distilled spirits brands and seven of the top 20.
Its presence with number-one or number-two brands in most of the major spirits categories would be difficult for a new entrant to replicate. Diageo's positioning in the leading categories means that its brands have high churn in on premise channels and significant shelf space in the off-premise channels.
In turn, this makes Diageo an important partner for bars, restaurants, and retailers, and the firm works closely with its customers to optimise product displays, promotions, and pricing at retail. We believe this is a competitive edge over less valued distillers, even one as large as Pernod Ricard, whose positioning as the leader in second-tier categories generates lower inventory churn in the on-trade and less shelf space in the off-trade.
Royal Bank of Scotland (RBS)
Royal Bank of Scotland, a dominant U.K. bank, has made considerable progress on its transformation, in our opinion. RBS destroyed its narrow economic moat with its global ambitions and reckless acquisition of ABN AMRO at the peak of the market bubble in 2007. RBS received £45 billion in U.K. government bailouts but has since lost it all, and then some, on dodgy assets and misconduct. While the road ahead is increasingly clear, we expect it to be a bumpy ride.
RBS' bad-bank assets, just £6.5 billion at September 2015, are down 95% from their peak, but the group is left with a loss-making investment bank, large liabilities for past misconduct, and a well-deserved reputation for poor customer service. We think that the additional clean-up costs, estimated at another £3 billion through 2017, along with £5.4 billion of misconduct provisions, will eat up much of the bank's operating profits through 2017.
