Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Mark Phelps, of AllianceBernstein, to give his three stock picks.
Hello, Mark.
Mark Phelps: Good morning, Emma.
Wall: So, what's the first stock today?
Phelps: We're going to talk about a stock called Ulta Beauty (ULTA). This is a retailer of cosmetics in North America. We like it because the cosmetic category is growing. People in particular are wearing more makeup these days. That maybe partly fashion but also because you're worried about someone taking a selfie and someone posting it on Facebook. So, you got to look your best. So, we see good category growth. They are also seeing a very significant change in the way cosmetics are sold. It used to be predominantly department stores in North America, but traffic to department stores is falling.
People aren't going to the malls so much, but they go more locally. So, we're seeing traffic going in more their local direction. They can open about 100 stores a year. So, that's going to help drive earnings. And this is one of those few areas where pricing is still strong. They are not being Amazoned because ultimately the cosmetics companies want to see this as a luxury business. They don't want to see prices cut significantly. So, we're seeing good strong margins within that business. So, we like Ulta.
Wall: And what are the competitors within this sphere? Are we thinking someone like Sephora? What would be the things that stop them growing at 100 stores a year?
Phelps: Well, Sephora is more into the urban markets and the big cities whereas they are more into the local areas. So, I think, they two happily co-exit and they will both take share from the department stores. But Sephora is probably the one that people certainly in Europe would know best that is similar.
Wall: And what is the second stock today?
Phelps: So, I'm looking at a company called Alibaba (BABA), which is a Chinese business. It's basically the controller of 70% of online sales in China through two marketplaces, one is called Tmall, which is a bit like Google and the other one is called Taobao, which is a bit more like eBay. They are not exactly the same. But basically, if you want to buy something online in China, you're probably going to go to one of those two marketplaces. So, that's a great starting point and that underlying business is growing probably 30% a year. But they do so much more and this is a phenomenal company.
And if you think about it, what really they are doing is getting data on every single person in China. They know every single person's purchasing habits, where they go, what they want to buy. They also know all the merchants' detail because they are a marketplace. So, they know whose business is doing well. So, then they start to offer financial services. Most people in China still pay with cash. I would suggest in the next five years they will pay much more in credit. Who will provide credit and financial, which is the associated business? Alibaba. And then you look at who is the number one provider of cloud services in China? Well, again, it's Alibaba.
And one of the things that's also quite nice from a competitive perspective, the Googles, the Facebooks, can't get in. So, the government helps support that marketplace. So, they have very strong underlying growth, great market position, lots of interesting sectors and some of their competition is prevented from getting into their market.
Wall: This is one of those stocks which is personifying the disruptor concept. I mean, it's not just doing it, it's then owning it in the market, so it's astronomical, isn't it?
Phelps: Absolutely. And they generate so much cash, they are going to grow into lots of areas. So, in the same way that you have a Google going into all sorts of different businesses, and Facebook the same, Alibaba is going to grow and we will see it in lots of different areas and we will see it increasingly in Europe and the United States as well. It has ambitions to be a global player, not just a China player.
Wall: And what's the third and final stock?
Phelps: So, I'm talking about Treasury Wine Estates (TWE), probably not a business so well-known to your investors. It's an Australian business. What they're doing in wine is trying to take it away from being something of an art to make it a fast-moving consumer good. What we want to do is go and find a wine we like at a reasonable price where we know it's going to taste much of the same every time we buy it. And although it's an Australian business, they have big production facilities in North America as well.
The interesting opportunity here though is for them to grow their market share particularly in China. Wine is growing nicely on a global basis, but particularly strongly in China. In China, they've taken control of their own distribution. So, they are able to control the branding, they are able to control the marketing structure, they've got very good control of price and they have good quality product, in other words, great on a global basis. And that's important, because they blend most of their wines.
They are not trying to have the one perfect wine for one perfect estate somewhere in the south of France that you can sell for ridiculous amount of money. They want just a very high-quality well-marketed brand that they can give to consumers consistently. And that's a very different way of selling wine and it's proving very effective and growth has been very strong and we think it will continue to be so.
Wall: Mark, thank you very much.
Phelps: Pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
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