Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and joining me today to give his three stock picks is Alastair Gunn, Manager of the Jupiter Growth & Income Fund.
Hello, Alastair.
Alastair Gunn: Hello.
Wall: So, what's the first stock you'd like to highlight today?
Gunn: My first stock is BP (BP.), obviously, a global oil producer. The reason I like it is that I think valuation is attractive. It comes with a 7% dividend yield today. I think that dividend is sustainable and eventually over time it will grow. The reason I think it's sustainable is that a year ago we had an oil price of below $30 a barrel. Today, it's between $55 and $60 and I think over time it's going to appreciate towards about $75 a barrel.
And that's partly a function of demand has remained strong, OPEC has finally started curbing supply and a lot of the CapEx cuts that these big oil companies have been making over the last two or three years to enable them to try and sustain their dividends are going to start impacting the supply side. So, we're going to see less oil coming out of the ground in two to three years' time and that potentially is going to see a squeeze in supply and a spike up in the price. So, I think, in that context, those dividends do look sustainable and we could see a kind of 7% dividend yield rerate down to maybe a 5% dividend yield which would give you 40% upside.
Wall: What's the second stock today?
Gunn: The second one is RPC (RPC). It's one of the largest plastic packaging companies in the world. Plastic packaging is a growth area. It's substituting glass and paper. And what makes this business very interesting is that in addition to the underlying growth there's an opportunity to consolidate very fragmented markets. And there are some big synergy benefits that come from putting two plastic packaging companies together.
What I like about RPC though is that it focuses on buying very high quality businesses that have good growth characteristics and their high returns are sustainable into the future. And I think the business really is just mispriced at the moment in the markets. You can buy it on about 14 times earnings, for about 15% dividend growth. And it looks very cheap against its international, principally its U.S. peers. But what makes that even more interesting is that those companies are generating growth through consolidation but they don't have much underlying growth. So, I would argue that RPC deserves to be rated at a premium to those international peers. So, there's quite a lot of upside from here.
Wall: And how do you balance the sort of shorter-term growth prospects, which you have described, with the longer-term trend that we are moving away from plastic packaging? I mean, there have been a number of cities across the world which have banned plastic packaging over the last year. It is a very long-term trend, but is that something that you consider when investing in a stock like this?
Gunn: Well, my investing time horizons are three to five years. So, I think, at the moment, the bigger trend is into plastic packaging away from paper and glass. But we've got to be cognisant of those kinds of risks. So, if I was being asked to pay 25 or 30 times earnings, I think that would be a bigger issue because I'd be making a much stronger bet on the long-term. But I think for now given the valuation, there's a lot of opportunity in my kind of normal medium-term investing time horizon.
Wall: And what's the third and final stock?
Gunn: The third stock for me is Gocompare (GOCO). This is a comparison website. It was recently demerged from Esure, the motor insurance company. I think comparison websites are very interesting business models. They are encouraging us all to shop around more for our energy, for our broadband suppliers, for motor insurance, home insurance and so on. And I think in the context of the U.K. economy over the next few years where we might start to see some kind of recession risk, certainly with weak sterling, maybe there's the potential for people's income to be squeezed again, anything that allows people to shop around more and get better value for money, I think is just a structurally growing business area.
But what makes Gocompare also quite interesting is that when you compare it with certainly MoneySupermarket which is the only pureplay quoted company in this area, it has much lower margins and some of these other business lines are not as developed as MoneySupermarket. So, I think, they've got an opportunity to play catchup and for their margins to catchup as well. And the business today is valued much more lowly than MoneySupermarket. So, I think, you'll get a combination of faster growth and an ability for the shares to rerate more towards the kind of valuations that MoneySupermarket enjoys today.
Wall: Alastair, thank you very much.
Gunn: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
