Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Killik & Co.'s Rachel Winter to give her three stock picks.
Hi, Rachel.
Rachel Winter: Good morning, Emma.
Wall: So, what's the first stock you'd like to highlight today?
Winter: Well, recently, we've seen quite a big increase in the number of clients who want to invest in stocks that are sustainable and environmentally-friendly. So, we've been looking at a stock called Ecolab (ECL) which is quite a large American business and it's a global leader in products and services for water treatment and hygiene. So, it does so many different things. But to give you an example, it cleans all the glasses for bars and restaurants. It treats the water that's used in food processing. It does all the laundry for hotels. So, many, many different things. But it charges quite high prices for its products, so quite a good profit margin there. But actually, its customers end up saving money, because by using the products they end up using less water, less labour and less energy. So, the customers are happy because they have got a long-term saving, because of that the market share is growing. And we've also got an environmental benefit there because less water and less energy are being used. So, for us, it's a win, win, win.
Wall: Now, we've recently had two very high-profile asset managers, Larry Fink and Jeremy Grantham, talk about how important ESG is going to be in the future of investing. But unless companies are able to offer profits as well as ESG factors, people are just not going to get behind it. But it sounds like this company is able to offer both.
Winter: Yeah, and I think we are now seeing more and more evidence that companies that do focus on sustainability, looking after the environment, looking after their staff, they are more likely to be around for longer. So, yes, they are ethical, and they are good from a moral point of view. But on the other hand, they are also good for long-term profits and long-term sustainability of your portfolio.
Wall: And what's the second stock pick?
Winter: Second one is Alibaba (BABA). So, I am choosing to talk about this one today because I think it's quite misunderstood by some investors for a couple of reasons. The first one is relating to the tariffs that Trump has been talking about. So, Trump wants to impose quite large tariffs on China. And I think that's one reason why Alibaba has come down a bit in price over the last few weeks. But actually, nearly 100% of Alibaba's revenue comes from China at the moment. There is not much international flow there and for that reason, I don't think that Alibaba at the moment would be severely impacted by these tariffs. So, at the moment, I think the stock is perhaps a little bit oversold. And the other reason I think it's a bit misunderstood is that it's often referred to as the Chinese Amazon (AMZN). But actually, I think it's a very different business model. So, Amazon is a retailer, it's selling products, it is the seller, it's selling a lot of its own products and is making money from that. Alibaba is more of a platform. So, Alibaba is helping smaller offline businesses to come online. It's providing the platform, the software, the logistics and the payment software. Whereas Amazon is really replacing small companies, Alibaba is actually helping them to come online. So, from that point of view, I think it's a very different business model and actually, in some ways, it is a more moral one as well.
Wall: Now, I am speaking to you here from Asia and Alibaba is known as a juggernaut in this part of the world. But it very much is, as you say, just about China for the moment. Do you think over the medium to long-term the company has views and aims to become a global player?
Winter: It does. First of all, I think it will become even bigger in China. So, at the moment, I think about 54% of Chinese internet users are using online shopping. So, there is a big scope for growth there just in China. In the short to medium term, it is looking to expand outwards into Asia, so looking at India, Indonesia and longer term it will be expanding more globally. And yes, that is potentially where tariffs could hurt it longer term. But I think that is quite a long time away and it's very difficult to know how long these tariffs, if at all, will be in effect for.
Wall: And what's the third and final stock pick?
Winter: Third one is a UK company, it's Direct Line (DLG). So, it's the largest general insurer in the UK. I like it for a couple of reasons. One, it's very cheap. It's currently trading on about 11.3 times price to earnings ratio. So, quite a long way below the average on the UK markets. It's also got a very high dividend yield. So, currently, over 8%. So, a very good one there for income investors. And also, we think that fortunes are improving for the company. So, it's heavily involved in motor insurance. Three or four years ago, this was a very difficult area to be in. Lots of competition and margins were being very heavily squeezed. But actually, over the last three years, we have seen quite strong improvements in the premiums that motor insurers are able to charge and therefore, we have seen an increase in profitability. And we think that is something that will continue. So, Direct Line we do think does look attractive at the moment.
Wall: Now, over the last decade insurers, including Direct Line, have been quite hit by regulation coming out of the EU, for example, including things like gender parity over premiums for motor insurance. How important is regulation to the future of this company?
Winter: It's definitely a factor. So, as you said, they have been hurt over the past decade. Last year, they did change the calculation for the amount that insurance had to pay out for things such as whiplash claims and that caused all the insurance stocks to drop quite heavily. So, there are things like that that could have quite a negative unexpected effect on these stocks. But one good thing about Direct Line is that it is involved in many, many different types of insurance. It's not just motor, it's home insurance as well. And I think that will help to protect them. And I think also the regulator is aware that it has harmed some insurance stocks in the past by these sudden unexpected announcements. So, I would like to think they would be a bit more careful about perhaps keeping the market more informed of its intentions in the future.
Wall: Rachel, thank you very much.
Winter: You are welcome.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
