Holly Black: Welcome to the Morningstar series, "3 Stock Picks." I'm Holly Black. With me is Colin McLean. He's Co-Manager of the SVM UK Growth Fund. Hello.
Colin McLean: Hello.
Black: And you're going to tell us today about three stocks in the portfolio that you're pretty excited about at the moment.
McLean: Yes.
Black: Where would you like to start?
McLean: I think I'll maybe start on one of the companies that has probably been affected a bit more by Brexit and those sorts of concerns, but we nevertheless think it's worth sticking with and that's Wizz Air, which is really not as well-known as Ryanair, but it's a company which, as with Ryanair, is focused very much on cost. And we think it'll still grow despite the possibility of a hard Brexit.
Black: But that was one of the initial concerns after the Brexit vote that none of us would be able to fly to the continent. It seems quite far-fetched as a notion to me.
McLean: We think that the companies have been doing quite a bit to adjust the share registers and to adjust the business model. So, they've had quite a lot of opportunity to address this. So, we think perhaps despite the stuff like official government planning, a lot of companies have got on with it. And yes, we don't think the flights are going to stop.
Black: And when budget airlines first came along, people sort of looked down their nose at them a bit, but I think cost has become more important to people. And actually, some of the planes are maybe better than their larger rivals.
McLean: I think that's quite a key point that a – in fact, when they started off and Wizz Air did not until more recently have a balance sheet or a credit rating they'd have loaded to lease more planes. But I know for the budget airlines the fleets are newer than many of the legacy carriers and anyone competing, say, Ryanair with British Airways, would see that. But they have ordered new planes and got better terms as their balance sheets improved. And they've become very ruthless cost operators. So, that's what ultimately seems to matter.
Black: So, what's stock number two?
McLean: This one is quite a different one in terms of its value-added and in control of its own destiny and that's AB Dynamics, which does a lot of car testing equipment, provides that to major groups like Mercedes and others. And it originally came out of sort of crash test dummy type of business, but it's much more sophisticated now, because it's not just driverless cars, autonomous driving but it's a whole lot of safety measures that you can put into cars. And there are safety standards that require very sophisticated testing, whole environments that allow you to test how the autonomous driving or the safety measures would react to pedestrians, combinations of cycle, urban environments. And not many companies can do it. So, they have quite good margins and very strong customer relationships as well.
Black: Is that quite vulnerable to car sales though, because obviously that's one area that gets hit, if there's a recession?
McLean: It's more driven by a research spend and by regulation and less so by just volumes of cars. So, it's one that's being driven by this technological change and by the requirements, say, particularly in Germany for new testing systems to go in. So, a lot of the trade disruption has hit manufacturing businesses quite hard because they need to move goods across the border, and they may be interlinked between lots of different countries supplying. If you're supplying a service or a very high value-added one, I think you're going to be much less impacted by trade friction or Brexit. They don't have lots of goods to shift across the border and they do have customers that can't really look elsewhere. So, I think that strength lies in the high value-added that it already has.
Black: And what's the final stock we're looking at today?
McLean: Last one is a FTSE 100 stock, Experian. We don't own so many FTSE stocks in the portfolio, because very often the growth slows as with banks, insurers and so on. But it does make the point that a number of companies like that are reinventing themselves and particularly something which was largely providing before credit assessment and ratings has pivoted to – structured itself more around the data that it has. That something's that's happening with other companies. So, Ryanair is realizing the customer data is something it can work with more as a travel business than just as an airline. And for Experian, it's realizing it's got some very rich customer data, which it can take much more use of. And there's not many companies that are in that position. So, it also gives the advantage of US earnings which may be some protection if the pound slips further.
Black: Well, thank you so much for your time.
McLean: Thank you.
Black: And thanks for joining us.
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