Emma Wall: Hello and welcome to Morningstar. I am Emma Wall and here today to give his three stock picks is James Clunie, Manager of the Jupiter Absolute Return Fund.
Hello, James.
James Clunie: Hi, Emma.
Wall: So a bit different from our normal format because of course you can short stocks as well as hold long positions. So your three stock picks maybe stocks that you don't actually like. We'll start with the first. What's that?
Clunie: The first stock is a short position in Tesla (TSLA).
Wall: And why do you not like Tesla at the moment?
Clunie: Tesla is an amazing stock. Effectively there are huge believers in the CEO, Elon Musk and belief in the vision of what Tesla can achieve. So there is a strong story around the stock.
But when I do fundamental analysis around it, I find lots of problems and lots of issues. And so effectively this stock comes down to fundamentals versus story. When it comes to fundamentals, we look at the valuation and we say, well, if the firm is successful in building a large number of cars, profitably every year, competition is limited and they can solve production problems then maybe it's justified at the current level.
But under other scenarios with intense competition where the manufacturing is problematic in terms of scaling up rapidly, we actually see the stock is egregiously overpriced. And so probabilistically this stock on average looks over priced. So we start from that.
And then on top of that, we see constant issuance of new equity and a need to issue new shares in future. We see negative cash flows, so profitability problems. And we see everything from corporate governance problems to aggressive accounting.
So, overall, we see a fragile stock with a valuation that is probably overpriced. And as a result we favour short position.
Wall: And what's the second stock today?
Clunie: The second stock is less well-known it's Kerry (KYGA), which is an Irish food company. And in Kerry's case the story is quite simple like many food stocks around the world is deemed to be very defensive and safe. And people have paid a lot of money for those cash flows. The share price is high and it looks to us overpriced on most scenarios looking into future.
Wall: So, you are shorting this stock?
Clunie: So we are shorting Kerry. And in addition, we actually see deceleration in revenue growth across food companies around the world. So we are seeing slowing growth but overvaluation. And in addition, we find again some aggressive accounting decisions and we see management sort of communication that to us looks a little bit over optimistic relative to the true prospects of the industry.
So as a result we see this as a fundamental short positon.
Wall: We'll end with something positive a stock that you do like. What long position are you highlighting today?
Clunie: Sure. We are sometimes positive, and one stock we do like is Rio Tinto (RIO), which is a London-listed global mining firm. Miners have been very volatile over the years as commodity prices have zigged and zagged. But effectively we see the story of firms like Rio as being companies with strong balance sheets and potential for good cash flows and improved capital allocation discipline. These firms have tended to overinvest in recent years.
They responded to higher metal prices by investing in large projects. Many of those projects are now done. Managements admitted that they probably have overinvested. And what we'll see is improved discipline, lower CapEx, higher cash flows and under most commodity priced scenarios the stocks actually look quite solid and quite cheap.
So, again, probabilistically Rio looks to us like a buy long position.
Wall: James, thank you very much.
Clunie: Thanks, Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
