Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by James Illsley, Manager of the JPMorgan UK Equity Core Fund, to give his three stock picks.
Hi, James.
James Illsley: Hi, Emma.
Wall: So, what's the first stock today?
Illsley: The first stock I would like to talk about is one of our housebuilders, Bellway (BWY). I think, Bellway – we were talking earlier about investment styles. Bellway is a great example of value investing. Unfortunately, I'm old enough to have seen several housebuilding cycles in my career and they typically follow the same sort of pattern. You go from pessimism to optimism and that's reflect in the share price. So, thinking about the recent cycle going back to 2007-2008 financial crisis, the recession.
At that time, there was a lot of negative noise about the sector, mortgages wouldn't be available, nobody's going to buy a house. Valuations got to really low levels and that's when we first reentered the sector. What we've seen since then is news is improved. We've seen the valuations pick up. Now these stocks have been trading on much higher valuations. And then we had Brexit come along and we get another opportunity to buy into the sector at a good valuation. So, it's just a classic example of that fear and greed, optimism and pessimism going through those stocks.
So, Bellway is one of the stocks we like. It's one of the smaller housebuilders in the sector and it really plays into the need for the U.K. to increase its housing stock. The structural dynamic and background is that we are only building about 190,000 houses a year against a need for perhaps 250,000, 300,000 houses a year. So, there is structural driver behind housebuilders. Bellway is a medium-sized company. It can grow into that demand and it's trading at really attractive valuations, 1.3 times book value, 5% yield we still think is attractive given that long-term outlook.
Wall: And what's the second stock you'd like to highlight today?
Illsley: Second stock is one that we might not be so familiar with. It's possibly the largest tech company that you've not heard of Micro Focus (MCRO). So, what this company does, it provides software to corporate customers which is business-critical, which tends to be old legacy type software. So, it's consolidating that industry.
Currently, it's got about 120 products under its umbrella providing to whole variety of corporates around the world. And because of its focus on this less glamorous area of tech, it can acquire those assets quite cheaply and put them on to its platform, put it through its distribution network and run those assets for cash and profit. Because the problem with tech companies, they often tend to be high growth but high cost as well.
Wall: Extremely expensive.
Illsley: Yeah. And they have high cost structures. So, Micro Focus brings them on to its platform, takes out those unnecessary costs, runs them for profits and returns excess cash to shareholders. So, this May, they just announced another acquisition Hewlett Packard Enterprise software business. Margins of that business is 23%. Micro Focus thinks that it can take those margins up to its normal level of 40%. That's a huge potential. It's going to drive tremendous earnings growth through this company and that's what's going to keep us in the company longer term.
Wall: And what's the third and final stock?
Illsley: The third one I'd like to talk about is topical given what's happening on the infrastructure and the politics. Clearly, on both sides of the Atlantic we've seen focus on infrastructure spend, fiscal stimulus take some of the heat out of the monetary side and CRH (CRH), which is a building materials company operating both in Europe and the U.S., is going to be a great play on that trend if it comes through.
To give you an idea of its scale, it's the number provider of paving products, asphalt and concrete products into the U.S. So, any stimulus that comes in from Trump is clearly going to be a benefit. We've owned this company for two or three years. When we bought it, it was cheap valuation. It was out of favor because of the weak recovery we're seeing in Europe.
Over the last two or three years we've seen the U.S. continue to grow. That's 50% of its business. And European recovery gather pace. So, we're seeing good earnings momentum from this company. It's a management team that really knows how to run the business. They recently acquired some assets from LafargeHolcim, integrating them into its business, great synergies and that will continue to drive that company going forward as well.
Wall: James, thank you very much.
Illsley: Pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
