Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Alasdair McKinnon to give his three stock picks. Alasdair is Fund Manager for Scottish Investment Trust.
Hello, Alasdair.
Alasdair McKinnon: Hi, Emma.
Wall: So, what's the first stock today?
McKinnon: Well, we divide our investments into three categories. So, I'd like to start with what we call an “ugly duckling”, which is, the U.K. retailer, Marks & Spencer (MKS). Now, retail stocks are very much out of favor. They are seen as being yesterday's news and there's a general mood that people won't ever shop on the high street again.
We think that's not right and we think in particular Marks & Spencer is very interesting because they have got a new management team in place, they've got a new Chief Executive and a new Chairman. We've met the Chief Executive who is quite an inspiring character and they are doing all the right things. They are addressing the problems in clothing that Marks & Spencer has been plagued by for a number of years and they've still got a very good food business and they are looking to expand that.
So, with a 6% yield and a very cheap valuation we think as the sentiment improves towards both Marks & Spencer and retail in general, this has got good opportunities going forward.
Wall: Now, you said the word plague there, because it has several new heads of design have come in and said, actually, they are going to be the person to turn this around for Marks & Spencer. There's been celebrity additions of particular clothing ranges. Why now? Why do you believe that actually this time Marks & Spencer has got it right?
McKinnon: You're right. There's been a series of people who said they are going to turn it around. I think why we think this time it's different is, Steve Rowe has got a mandate for change. The company realizes that it can't mess around anymore.
We've met him and he has put in place a very sensible strategy. He is basically saying, I'm going to end the promotional discounting ethos that existed and I'm going to start doing what we do really, really well. And they've got a number of basics they feel they do really well and they are just going to focus on that. They are not going to try and compete as they were trying to do with other retailers who do some things better than them.
Wall: And what's the second stock today?
McKinnon: The second stock is our largest holding, which is called, Treasury Wine Estates (TWE). Now, this is a company we categorise as “change is afoot” because this was a stock that was very unliked when we first bought it, but it's now become more popular because people are understanding their change that's taking effect.
They are an Australian-based wine producer and they've had an extremely checked history, a number of profit warnings, a number of new Chief Executives because they – the wine business is deeply cyclical. You plant vines and then for 15 years you just have to accept that they are going to produce grapes…
Wall: Fingers crossed.
McKinnon: Fingers crossed. And there was a big glut of wine for a number of years and these vines, they just keep growing. But eventually, the industry has rightsized itself and Treasury Wine Estates has done really well with a new leadership, very inspirational chap running it. They've made great inroads into China.
They have got – the Australian dollar is really helpful to them as an exporter as well. So, we see a massive opportunity still going forward for it. It's already turned around but now there is this – the longer-term cycle is still to play out.
Wall: And what's the third and final stock?
McKinnon: The third and final stock is one we classify as “more to come”, Nintendo (7974). Now, I think, everyone will have heard of Nintendo. They have been around for an awfully long time. They have got some wonderful intellectual property. We bought this stock when it was, again, very much out of favour.
But what we saw at that time was this wonderful intellectual property, a very cheap valuation. In fact, it was – had net cash and the fact that nobody really liked it. Nobody thought they could fix it. Nintendo have had to change. In a way, they are the Apple of Japan. They do things their way and they are not going to be told what to do by anyone. They decided they wanted to license their intellectual property and that first got people interested in the company. You remember the Pokémon Go…
Wall: Phenomenon.
McKinnon: Phenomenon of last year. That got people – showed what their intellectual property can do. But the thing that's really got the share price going in the last few months has been this new console they've launched, called the Switch. You can either play it on your TV as with a traditional console or you can play it as a handheld.
And it's proving extremely popular. In fact, they can't make enough – there's months – if you go try and buy in this country, there's months delay to buying one. So, we think this is going to be a surprise hit and it's becoming more better-known now, but we think this is still an underappreciated stock.
Wall: Alasdair, thank you very much.
McKinnon: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
