Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and here with me today to give his three stock picks is Ali Unwin, Manager of the Neptune Global Technology Fund.
Hi, Ali.
Ali Unwin: Good morning.
Wall: And what's the first stock that you'd like to highlight today?
Unwin: The first stock I'd like to highlight is TSMC, the Taiwan Semiconductor Manufacturing Company (TSM). So, this company had its 30th birthday last week and they really pioneered the what we call, the foundry model in semiconductors. So, traditionally you would design and make semiconductors within the same the company because it's a hugely complex, a very capital intensive activity.
What TSMC pioneered and the model they've really built out was that they would make it on other people's behalf, a bit like an outsourcer, but that's probably the wrong term, given the complexity and the degree of integration they need with their designers.
The reason I really like the company is that they have a huge degree of diversification, so if you are buying a semiconductor company, you are taking on some risk with how well that company performs. TSMC are making semiconductors for 500 different customers. There are 10,000 products coming out of it. You're essentially buying, if you're like an arms dealer for the digital future.
The stock has done quite well this year, but the founder Morris Chang, he's one of the sort of godfathers of the digital age is stepping down and passing on to next generation. And we think that competition is going to find incredibly hard to do what TSMC does.
Wall: And what's the second stock today?
Unwin: The second stock is a mid-cap stock called Pegasystems (PEGA). They do customer relationship management software, so they compete with salesforce.com. Here is really a story of a company that has been probably under-investing on sales and marketing. They tended to focus on the big – the 50 biggest companies in the world, they're now moving downscale a little bit and we think that they're starting to see some real success there.
Wall: And where are they moving into – is this a global stock, is this very much a kind of U.S.-centric company?
Unwin: So, this is a U.S. company, founded 33 years ago and the founder Alan Trefler still is CEO. And they are moving more in terms of size, actually. They're traditional with such a big installation for people like big insurers – Toyota is a big customer and they're now moving into the sort of second tier companies. And we think that there is actually a lot to go for there. Not everyone wants to be on salesforce, not everyone wants to be in the cloud. And we think Pegasystem has got a really, really strong solution.
Wall: And what's the third stock today?
Unwin: The third stock is at the small cap end of the spectrum. This is a $1.2 billion company called 8x8 (EGHT). And they do something called unified communication as a service, which is a bit of a mouthful. But all it really is if you are in an office and you can dial 123 to connect to someone else in the office, that's called a private branch exchange. They do that bit effectively in the cloud.
This company has actually not done as well. They've actually been out-executed by two good peers; one of him was just bought by Cisco for $1.5 billion; and the other one has doubled this year. So, this is really the laggard in the space.
They've changed over the sales leadership and some of the marketing functions and we are giving management the benefit of doubt given that this trades on virtually half the multiple of that peers. So, we think there is a bit of catchup trade here.
Wall: Is that a risky bet for you given that there seems to be two more dominant players within the market. Taking a bet on a stock that hasn't done so well, what do you look for in order to believe that management whether they can achieve what they've set out to?
Unwin: So there is obviously execution risk and company is not always just profitable. We've spoken to some customers who actually really like the product. And one of the big uses of the – and you may not think of it as a tech leader is that Lewisham Council has taken 10,000 seats of this product. And apparently are extremely happy with it.
So, yes, there is obviously execution risk and there are other players. But don't forget this market is a $25 billion market and that the company's turnover is currently only $300 million. So, we think there is an awful lot to go for here.
Wall: Ali, thank you very much.
Unwin: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
