Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by James Henderson, manager of the Lowland Investment Trust (LWI), to give his three stock picks.
Hi, James.
James Henderson: Hello.
Wall: So, what's the first stock today?
Henderson: That's going to be a big company, Anglo (AAL), much in the news at the moment, Anglo American. The share price has fallen a long way in recent years. It spent money at the wrong time in the cycle and it spent a lot of money on iron ore at the wrong time in the cycle. They came on stream just when demand was falling. But over the last period it really looked at itself really hard and it's getting out of iron ore. It's selling that operation and it's focusing on what it's good at.
One of their best business in our view is De Beers, the diamond business and I believe diamond demand does return as the middle classes across the globe get a bit more confidence, we'll see diamond prices pick up again and they do control the market fairly well and that is a really quality business. It doesn't require the Chinese building a new city. It just requires people little bit of confidence on the high street and jewelry spend goes up. And I think that business alone, we'll look back and thing, gosh, you could buy Anglo with De Beers in there for these sort of prices in a few years' time.
Wall: What's the second stock today?
Henderson: The second stock would be a company again under the cosh, IPF, International Personal Finance. This is unsecured lending. It was a spin-out from Provident Financial a few years ago. It's unsecured lending in Eastern Europe and Mexico. It's had a problem and there are always problems in the unsecured lending market with regulation and its Slovak business has been hit.
But over time it achieves very good returns on capital and it generates a lot of cash and we get that cash back in share buybacks and dividends. And I think it will get back on to that path at the moment because people are still worried about financials, the share prices come back, and I think that's a real opportunity?
Wall: And how dependent on interest rates within the locality is that company?
Henderson: Well, it's rather like Provident Financial is in this country. Because the actual lending rate is so high, a move of a 1% or 2% in the interest rate doesn't have much effect. Their problem in the financial crisis was actually getting the deposit side; but they are well funded now. It's very strong on the funding side now.
Wall: What's the third and final stock?
Henderson: Third and final is Shoe Zone (SHOE), a small company this time. It's around £100 million market cap, came to the market last year. It's on the high street and its sites work in tertiary and secondary sites on the high street and there aren't many retail formats that do work there at the moment. So, what they are seeing is they are seeing rents fall and yet they can trade profitably at these higher rents.
So, over time, they will grow that to state and on lower rents with a profitable franchise I think again they will generate cash and they have so far. Since they have come to market we've just have been getting a special dividend from them already. So, this year with the special dividend they would be yielding about 9%. It's a good solid business.
Wall: And a lot of retailers have been hit hard by ecommerce. It that a threat to Shoe Zone?
Henderson: Well, they have got an ecommerce business. In the end, shoes are something you like to try on and that's the good thing about having a big estate and building that estate. You will see that Shoe Zone sign and you will go in there. But they can grow in ecommerce business, so it's an opportunity as well.
Wall: James, thank you very much.
Henderson: Thank you, Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
