Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by Nick Ford, Manager of the Miton US Opportunities Fund to give his three stock picks.
Hi Nick.
Nick Ford: Good afternoon Emma.
Wall: So, what's the first stock you'd like to highlight today.
Ford: The first stock I'd highlight is a company called PRA Health Sciences (PRAH). It's the biotechnology and pharmaceutical sectors in the U.S. And those are two very promising sectors if you think about the growth outlooks because the innovation and scientific expertise that America has developed over the last decade or so within genomics and other related skills is really very, very impressive.
So, investors have a choice when they think about investing in a biotechnology sector they can either invest directly in biotechnology companies directly companies like Amgen, Biogen, Celgene which are very promising, but the share prices can be very volatile. Another way to play the growth in this sector is to invest in the companies which provide the services to the biotechnology companies.
So, you are participating in the growth of the industry without taking on too much direct risk, because sometimes promising new drugs fail they don’t get approved and you can have quite adverse share price reactions. So, PRA Health Sciences provides testing services it tests the drugs to see if they work. It has hundreds of different clients and products it is working on. So, if one product fails it doesn’t affect the company's earnings, but it still benefits from the growth in the industry.
Wall: What's the second stock pick?
Ford: The second stock pick I would go for would be Pool Corporation (POOL). This is actually not a particularly glamorous business. The company is a distributor of swimming pool supplies to operators and owners of pools across America. But what we really like about it is that after many years of making acquisitions the company now dominates the pool supply distribution industry and really doesn’t have any competition at all.
And we are very keen on businesses that generate strong free cash flow with limited – with virtually no competition and good growth outlooks because with the American consumer in good shape and household wealth going up we're starting to see more pools being created. And even if more pools aren’t created they still have a huge established pool base to service. So, it's a good long-term business.
Wall: Is it one of those businesses where you can actually see the earnings coming in year after year way in advance because you do have that sort of sticky customer set.
Ford: Yes, exactly. We are very keen on companies with what we call repeat business or recurring revenues, and swimming pool owners have to go back every few months for new chlorine, for new filters for the pools and so forth. The nets that you rake the leaves up with gets worn out. So, it's a wonderfully predictable business. There is good pricing power because the company doesn’t have any competition.
Wall: And what's the third and final stock?
Ford: The third and final stock I'd go for would be a company called Worldpay (WP). This really highlights the way we think about investing in the technology sector. Because technology stocks can be risky and very volatile. We prefer to invest in maybe some less glamourous more predictable businesses again businesses with a lot of repeat revenues.
Worldpay is a payment processor for credit cards and debit card operators and its customer base is right across America and in the UK now. They provide the payment infrastructure and software to enable transactions to be processed. And what we like about the business is they get a fee every time somebody makes a purchase with their debit and credit card and the incremental costs of the business are very low.
Wall: And presumably with the U.S. consumer looking pretty healthy that’s just to know that it's going to grow. Perhaps not the same can be said about the UK consumer at the moment with the threat of Brexit is it, small enough proportion of the business that’s not a concern.
Ford: They acquired – Worldpay was originally called Vantiv. They changed their name to Worldpay after acquiring a UK business last year. But the majority of the business is in the U.S. The UK side will be a good stepping stone for them to branch out into Europe.
So, it's a good business. And the other thing I would mention is that the outlook for consumer spending is very strong. So, we should see more business going on to debit and credit cards and we like the fact that consumers are using cash less frequently they are using their cards more often. So, there is a nice trend to using cards and away from cash.
Wall: Nick, thank you very much.
Ford: Thank you.
Wall: This is Emma Wall from Morningstar. Thank you for watching.
