Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by James Henderson, Manager of the Lowland Investment Company (LWI), to give his three stock picks.
Hello, James.
James Henderson: Hello.
Wall: So, what's the first stock you'd like to highlight today?
Henderson: I'd like to talk about a small company because I've held it for a long while and it has been a very successful investment. And that would be Johnson Service Group (JSG). It is best known on the high street as the dry cleaner. But it got out of that to do more for laundries and it's now the biggest laundry cleaner. So, hotels, restaurants, when they want their laundry done, it goes to one of their laundries around the country.
It was a problematic share, a real problematic share on the high street doing dry cleaning. Actually, if you think back to when people stopped smoking in pubs, suddenly people had to have their suits clean less, the clothes cleaned less because it didn't smell of smoke and the turnover for those high street dry cleaners fell and the company had a very poor time and it needed a rescue rights issue to put it back on its feet. And when people have real difficulties, they look at their business and they think what they do well, and it was not there that they were really good at; it was as a laundry business, working for the big hotel chains, for instance. And that's what they now focus the business on and it's been a wonderful success story in recent years.
Wall: Quite an interesting business because I imagine it's contract-based which means you get a bit of visibility on future revenues if they secure a big client for several years, a big hotel group, then that's quite nice to be able to see those earnings into the future?
Henderson: That's right. And I think it's fairly regional too. You don't want to be moving the laundry huge distances. So you can start in an area and build around and that way it isn't a contract that's suddenly nationally you lose. It's more geographical and that gives a diverse customer base, although they are well-known often the customers.
Wall: And what's the second stock pick today?
Henderson: The second stock pick has been in the portfolio since 1992 and that's Hiscox (HSX), a medium-sized company. It's grown a long way over that period. It is a specialist insurance company, property casualty in the Lloyd's market and then the high-net-worth insurance in the retail market. It's grown very successfully in recent years in the US. But behind it all is its underwriting culture. It's underwriting for profit not for just doing the business. And that was there when it was a small company and as it's grown over the years it's never lost that culture of underwriting for profit and really, if the rates fall a long way to walk away from the business. And that's still ingrained in the company and they have avoided some of the cyclicality of the insurance industry.
Wall: And what's the third and final pick?
Henderson: The third and final pick is Severn Trent (SVT), a large company. We've had a small, medium and now a large company. Severn Trent, because of the water utilities, it has been getting things right. There's leakages going down. It's out of favour because of all the politics around it. But it is an English water company and that makes, I think, it less likely to have problems with Scottish MPs saying, it should be nationalised or something like that. Maybe that would be an argument in time. But meanwhile, it does what it does well, and the regulator is relatively happy with them.
Wall: James, thank you very much.
Henderson: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
