Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Moritz Sitte to give his three stock picks. Moritz is the Manager of the Baillie Gifford European Fund.
Hi, Moritz.
Moritz Sitte: Hi, Emma.
Wall: So, what's the first stock that you would like to highlight today?
Sitte: The first stock I would like to highlight today is Zooplus (ZO1). Zooplus is the leading online pet food retailer in Europe. So, if you are looking for a big bag of cat or dog food delivered to your house at the lowest possible price, this is where you go, Zooplus.
And if we use our framework for analysis, which focuses on alignment, growth and edge, if we go through that for Zooplus, we get really excited. Because when it comes to alignment, Zooplus is a founder company. The founder still owns 5% of the company and he has been building this company for almost 20 years now.
With respect to the growth opportunity, right now, Zooplus controls roughly 50% of the online market, which itself is still a small part of the overall pet food retail market. So, the online penetration levels are something around 10%. So, we think there is a long runway for very profitable growth for Zooplus.
And thirdly, when it comes to the question of edge, we believe Zooplus has an advantage, thanks to its scale in its market, but also thanks to focusing just on pet food retail and that has allowed the company so far to compete successfully against not just the brick and mortar players but also online players such as Amazon.
Wall: What's the second stock today?
Sitte: The second stock today is Bechtle (BC8). Bechtle is a German IT services company and it's certainly not a household name, I realise that. But I think it highlights the sorts of companies that we tend to find in continental Europe which are often hidden champions that have very dominant positions in a particular niche and that can grow organically and by way of M&A, and Bechtle is a prime example in my opinion of that.
So, it was set up by a founder. He is no longer involved in the business, but his family still owns a big chunk of the company. And therefore, we think, again, the company culture, the company management, they are aligned with the interest of long-term owners such as our clients.
With respect to the growth opportunity, it's probably not growing as fast as Zooplus. I think that's a fair statement. However, the business can grow organically by serving more and more small and medium-sized enterprises in German-speaking countries and it can grow through M&A by rolling up a fragmented, or what still remains, a fragmented market.
And finally, its edge, in my opinion, again, lies on this focus and on its scale advantage within its niche. It is a small player in the overall IT services market. But if you look at serving SMEs, it is the dominant player.
Wall: It sounds like you prefer businesses that are rather than jack of all trades that instead stick to one thing and they do that very well. And you can often find within Europe or within large connected markets, companies do tend to spread and that’s sometimes when they get in trouble.
Sitte: Yes, I think so. I mean, it doesn't apply to every business. There's always exceptions. There are always exceptions to the rule. But I think there's a lot of power to be had by having an organisation that is focused on a certain type of customer on a certain type of market, because a business can therefore can build up knowledge and expertise and then serve its customers better.
Wall: And what's the third and final stock?
Sitte: The third and final stock is Avanza Bank (AZA), which is the leading online savings platform in Sweden. And again, it was set up by a founder who remains the Chairman of the company and again, he owns a chunk of the business. And we think he has created a culture inside Avanza Bank that is very much focused on servicing customers, on providing not just low prices but a great service to them as well, a great user experience. So, we think the culture really aligns well with the requirements for our clients.
Wall: And financial services companies within Europe have been out of favour in recent years. They have rather all been tarred with the same brush as some of the ones that have had negative press such as Deutsche Bank. Is that a value opportunity for you when you see a downgrade across the sector such as that?
Sitte: I think we are always looking for great businesses. I think that would be our sort of first hurdle. And I think Avanza Bank clears that hurdle with aplomb. But I think this sort of sector coming out of favour and into favour allows us to buy great businesses at pretty good prices as well. So, I think, it's an even better advantage for us. But it's not how we try to find great businesses.
Wall: Moritz, thank you very much.
Sitte: You're welcome.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
