Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm here today with Richard Clode, Manager of the Janus Henderson Global Technology Fund to give his three stock picks.
Hello Richard.
Richard Clode: Good morning.
Wall: So, what's the first stock you'd like to highlight today?
Clode: I'd highlight Broadcom (AVGO) and I think they are perceived as a supplier to iPhones, but actually the vast majority of their business is actually supplying semiconductors into the data centre. And I think we all know with the explosion of data, the explosion of the cloud they are in a very great sort of position to provide all these semiconductors to the likes of Google and Amazon. And they trade on a very low multiple and the investors are being distracted because they tried to bid for Qualcomm opportunistically. I think we are going to go back to the core story which is very nice, they got a franchise that’s growing nicely exposed to the right areas on a very cheap valuation throwing a lot of cash. Which they are now going to pay out as dividends and the stock is also going to have a 4% yield which is not often something you find in the technology space.
Wall: And you mentioned who this stock is supplying. I think that’s quite key in tech as well. Because we have seen some smaller companies fall by wayside when their one big client ,be it Apple or whoever, suddenly cancel that contract and you are left with a stock that's then worth not very much at all.
Clode: Exactly, I mean we put very low multiples on stocks that are 80%, 90% exposed to one customer, particularly a volatile sort of customer where you can lose the socket one year with say an iPhone. So we very much reflect that and we feel that a lot of investors maybe particularly in Europe don’t do that and that’s why they have felt lot of pain with some of these stocks.
Wall: And what's the second stock pick today?
Clode: I'd highlight a smaller stock Ambarella (AMBA). And this is a company that makes the video compression chips which historically went into go pro sport cameras, into drones. And that was obviously very volatile business. They always had very good technology this company. And now they are addressing a much more exciting market, longer term growth market and less volatile market which is autonomous driving and intelligent AI computer vision which is being used in security surveillance as well. And we think that pivot will allow this company to have a much sort of bigger growth opportunity, a much higher margin and more sustainable business and the EV of the company is just over $1 billion. When you look at what Intel paid for Mobileye or the valuation of NVIDIA's computer vision business, we think this company is materially undervalued if they can get any traction in this business.
Wall: And how competitive is this market?
Clode: There are actually only a few kind of large guys doing this. There is Intel they have bought Movidius, you have NVIDIA doing it, you have a couple of other guys doing it. But it's mainly the big boys who have maybe bought some smaller guys and then this company and that’s a risk in itself that they are competing with much bigger guys out there. But also is the opportunity given the valuation that you are paying today. So we think that the risk reward profile is pretty strong here.
Wall: And what's the third and final pick?
Clode: Universal Display (OLED) is kind of pure play on flexible displays and at the moment they are being punished because of this lack of success of the iPhone X. So that’s being seen as the acid test of demand for flexible displays. We think that’s the wrong perception that actually flexible displays are being used for Samsung for years and you don’t have to sell a $1,000 phone to have a flexible display. And also longer term we are going to get foldable displays and I think we'll see something from Samsung maybe later this year early next year and ultimately in the iPhone. And we think that’s a quite game changing form factor that you could have a phone that folds out into a tablet and we think that will give us a driver for the business. And this company has a lot of IP and they sell it as both an IP license as well as materials. And at the moment the valuation if you think about what they could be able to potentially earn in the next three or four years is very cheap given they have been beaten up so much around the iPhone cycle.
Wall: And how do you decide with a stock like that whether it's been beaten up because of a specific event and actually the long term prospects are still interesting versus a value trap.
Clode: This is the key and we often go back and look at that original investment case, has anything changed in terms of the growth outlook for this new technology? Do we think the flexible displays are less likely to be adopted in the future, no. Do we think that the company's franchise is being diminished in any way, again we think no actually during this period they have actually signed a new long term contract with Samsung which I think gave us a lot of comfort given that it was a key concern. Then obviously now the valuation has halved and the expectations have come down. So, we think now is a good opportunity to invest in the stock.
Wall: Richard thank you very much.
Clode: Thank you.
Wall: This is Emma Wall from Morningstar. Thank you for watching.
