Holly Black: Welcome to the Morningstar series, "3 Stock Picks." I'm Holly Black. With me today is Richard Pease. He is Manager of the CRUX European Special Situations Fund.
Hello.
Richard Pease: Hello.
Black: So, you're going to tell us today about three stocks in the portfolio that you are particularly excited about at the moment. Where would you like to start?
Pease: It's always tricky – because we have 60 holdings, it's always tricky to pick three. And I haven't just chosen the sort of sexiest ones, but I think it's important to just choose some of the ones which give you a bit of a flavor.
I think the first I'll go and choose is SPIE (SPIE). This is a French-based but European-wide outsourcing stock which does some hard outsourcing things like air conditioning maintenance, energy maintenance, environmental stuff. And like a lot of companies, it got very badly hit last year, because it actually made what we thought was a very good acquisition in Germany, but it increased its leverage. And the market was tough on mid-caps. It's about a 2.5 billion market cap company. But it was tough, particularly on leverage. We've actually always backed people who do things, and this is a very good example. The guy who runs it – a guy called Gauthier [Louette], who is the CEO, he has a big stake – he has about 4% of the business – I think it's about 4.5% and the management have sort of same again. So, that's a lot of money obviously. And he is running it for long time very successfully and the stock got absurdly cheap. It was on about 7 times earnings at the bottom yielding about 5. It's bounced quite sharply. It's now about €16.5. But even at €16.5 it's still cheaper than it was two or three years ago when it IPO-ed from private equity.
Black: Is that something you look for, management ownership, in a company?
Pease: Very much so. I think it's much more convincing than the chat if people have actually genuinely invested. And as I said, Gauthier has got a big stake and he hasn't sold shares.
Black: Super. So, what is stock number two?
Pease: Well, I think, I'd probably go for Dustin (DUST). Dustin is a Scandinavian stock. It's quite small. If you put it into euros, it's about 700 million. And it may not sound hugely exciting. What they do is effectively – they are a distribution business of IT stuff. The story really is that you get your foot in the door selling your SME, just a small mid-cap company, some IT and then you could do much more for them. So, you have a helpdesk, then you do cloud offerings and that's much stickier revenue stream and a much better margin potentially. And the nice thing again about this sort of story is they can continue to do bolt-ons. And so, they've done one in Holland which is good, and they've done a second one. You get the synergies obviously after you've done one and then you get synergies. And so, that's starting to very much go in their favour and it's not expensive. It's got a decent dividend yield. It's I think 3.25 or something, but that should be 4.5 next year. It's a nice leap. And from a balance sheet point of view, it's got a good balance sheet and we're very impressed with the management. They're ambitious but they are sensible. So, we're happy with that.
Black: Super. Is actual size of the company, 700 million, is that about standard for the portfolio or is that on the smaller side?
Pease: That's on the smaller side. We only have about 8.5% of our portfolio in stocks under 1 billion actually.
Black: Okay. So, what is the final one we are talking about today?
Pease: Well, it's particularly unpopular, it's a company called Stabilus (STM). It's very unpopular for two reasons. One particular reason, which is, it's something to do with autos. Autos have been very tough as you can imagine. And a very charismatic CEO left to do something else. He has actually kept his shares as it happens. But what we like about it partly because just the valuation, it's €40. It was €90. So, it's obviously very unpopular. What they do is, they do gas springs. And I think in English if you have an SUV and you click your key, what makes your boot go up is the Stabilus gas spring. It's called POWERISE. They do other things too. They do lots of things, everything to do with seats. Making a car more comfortable and easier. So, bonnets will now be also using these things too. And car sales have been weak and so, it has been a tough quarter or two for Stabilus and stock price have obviously come back very sharply. But it's pretty cheap, than I saw 10, 10.5 times sort of thing in terms of P/E. And it's got a good balance sheet and they are very dominant in a global niche and we kind of like that.
Black: Super. Well, thank you so much for your time.
Pease: Pleasure.
Black: And thank you for joining us.
