Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Rachel Winter from Killik & Co to give her three stock picks.
Hi, Rachel.
Rachel Winter: Good morning, Emma.
Wall: So, what's the first stock today?
Winter: First stock is a company called Vonovia (VNA), which is the largest residential real estate company in Europe, makes most of its profits from owning properties and renting them out. And in Europe, actually, rented property for the whole of your life is pretty much the norm. It's not really like the U.K. where we all strive to own a property. So, these rental properties in Germany, they have very long-term leases, which we like. So, Vonovia is a company that pays out most of its rental income and therefore, the yield on the company is about 3.5%, which is very attractive at the moment.
And the other reason we like it is that we think property prices within Germany will start to rise. And the reason for that is that interest rates have been very low for a long time and we think that will lead to inflation. So, really, the job of the European central bank is to keep the interest rates in Europe at the rate that's appropriate for the weakest economy in Europe. So, the current rate is probably appropriate for a weaker economy like Italy. But for Germany, it's way too low. So, we think that's going to lead to inflation. That will feed to the property market and that will be good for the property portfolio that's owned by Vonovia.
Wall: And pretty attractive yield there as well?
Winter: Yeah, definitely.
Wall: And what's the second stock today?
Winter: Second stock is Continental (CON). So, this is another German company. This is another play on electric cars, which I have mentioned before. Continental is famous for making tires, but there are two different reasons why we like it. One is that it's very involved in powertrains for electric cars. So, as we start to use more electric cars, those powertrains will see a lot more demand. And the second reason that it's a leader in sensors and radars.
So, these will be involved in autonomous driving, but we think that probably is quite a long way off just yet. But at the moment, we do have a lot of driver-assisted cars. So, for example, things like parking sensors are becoming very popular. So, Continental is doing well for making the technology for those.
Wall: And a lot of sort of component-like companies such as this are rather reliant on the client base that they supply. We saw it with the chipmaker, for example, in recent years when their major client Apple cut that contract and the chipmaker then came in trouble. How much of that is to be considered with a company like this? I mean, does 90% of their revenue come from one car manufacturer, for example?
Winter: No, it doesn't. So, at the moment, they are very involved with a lot of different manufacturers. But what's quite reassuring with Continental is that they are no longer just making all their revenue from German and European companies. They are expanding into the U.S. and Asia. So, whereas they used to be purely European and they would just serve the European car manufacturers, now about 50% of their revenue comes from the U.S. and Asia. So, I think, that is very reassuring.
Wall: And what's the third and final pick?
Winter: Third one is probably a bit of a boring one. It's National Grid (NG.), which I think is quite interesting at the moment because utilities have really sold off in the last few months, because people are concerned about Corbyn trying to nationalize utilities. So, we think National Grid is probably oversold. Two reasons for that. One is that about 50% of revenue for National Grid actually comes from the U.S. So, that part of the business is outside of U.K. regulation.
The second part is that the U.K. part of the business is not trading much above the regulated asset value. And the regulated asset value is the value that we believe the government would have to pay if they did nationalize National Grid. So, therefore, we think, if it did happen, the downside for shareholders would not be particularly high. But that aside, we think that the likelihood of National Grid being nationalized is fairly low in relation to other utilities like water companies and consumer-facing power companies.
Wall: It's a really interesting stock, because a lot of the time politics has little to no effect on stocks because they are so global, because they are almost countries themselves in terms of their power and their remit. But utilities is one sector which is highly-regulated, which is politically-sensitive. And so, a story like this, as you say, has massively affected the share price?
Winter: Yeah, it's huge. But actually, since National Grid has been privatized, they have actually massively cut the cost for consumers. So, I would be very surprised if this is the first target for Labour to nationalize if they did come into power.
Wall: Rachel, thank you very much. This is Emma Wall for Morningstar. Thank you for watching.
