Holly Black: Welcome to the Morningstar Series "Three Stock Picks". I'm Holly Black with me is Duncan MacInnes, he's Manager of the Ruffer Investment Company. Hello.
Duncan MacInnes: Hi.
Black: So we're going to talk about three stocks in the portfolio that you're quite excited about at the moment. Where would you like to start?
MacInnes: How about we start with the biggest holding in the portfolio, which is Walt Disney Corporation. Now, we all know what Walt Disney Corporation does, but my shorthand for it is that it attacks on parenthood. Walt Disney is just this amazing company that has the best intellectual property library, arguably in the world. It's got the Disney characters, Star Wars, Pixar, Marvel, Avatar and the Simpsons. So, what they are uniquely able to do is monetize that IP library by selling products, consumer products, things like lunch boxes and hoodies, but also movies, TV shows, theme parks and cruise ships. So, the they can funnel all of these products through all of those different end markets. And the best thing about it is that because their customers are children, they have a new customer born every day. Someone who is born today can enjoy those products just as much in 10 years time as I enjoyed the Lion King and a lot of…
Black: You still do.
MacInnes: …20 years ago. So that's fantastic. But today's valuation, we think we get their new business for free, and that's Disney+. So, Disney+ is their streaming on demand service, which launches next week in the US And if that goes well and given their historic success and ability to monetise their IP, there's no reason to believe it won't. It could look an awful lot like Netflix in a few years time. Netflix is currently valued at $150 billion. So, the upside is pretty large compared to Disney's current valuation.
Black: Excellent. Okay. Let's go on to stock number two.
MacInnes: Yeah, and another let's stay in the US. General Motors is one of our top 10 holdings. Now, it's interesting for two reasons one top down and one bottom up. Top down we like it because it has value characteristics and cyclicality and those are things that we're looking to try and get into the portfolio. But from a stock perspective, investors don't want to own autos because they're worried about a recession. They're worried about trade wars, longer term, they're worried about the rise of autonomous vehicles and electric vehicles. And because of those concerns, the stock is trading on about five to six times earnings today.
But we think the earnings are much more sustainable than the market thinks, because two thirds of GMs profits come from selling pickup trucks in the US Now I don't think it's too much of a leap to say that Joe Sixpack in Arkansas is going to be a slow adopter of Tesla or other EVs and therefore we think GM is going to be around for a long time. But even if you start to consider the longer term disruptive influences on the industry. GM is actually the largest shareholder in Cruise, which is the world leader in autonomous driving. It's also the second largest shareholder in Lyft, which is the main competitor to Uber. So, if you look at it stakes in these startup businesses, they're worth about a third of the current market cap. So actually, the stock is cheaper than it appears on the face of it.
Black: That is true you don't often consider the other investments that a company has I think of GM just as itself, I didn't realise it was invested in Lyft.
MacInnes: Yeah, these hidden assets can often be quite valuable. It's something that we often look for when analysing stocks because it gives you some downside protection.
Black: So, what's our final stock.
MacInnes: The last stock, let's go to the UK and talk about Ocado. Now, this is interesting because it's not a typical, Ruffer investment. Ruffer are known I think as having a value bias and Ocado is not a value stock, but we first bought it in 2016 at £2.50 or thereabouts. And the reason it was £2.50 is because people really had major question marks about whether or not their technology was viable. Now, their technology has the ability to deliver heterogeneous, low margin product like groceries online profitably. Well, today, you can go on YouTube and see that the technology is working, and it's extremely impressive.
And that's taken the stock from £2.50 to £12 today. But actually, we still really like it. In the next couple of years, the story is now about how can they roll out and deliver that technology to their international licensing partners. And that's underway right now. As they start to do that, they will receive their high margin licensing cash flows from their partners. And it's at that point, I think that the market starts to realize that this is not a food retailer. This is a technology company. It's maybe the best technology company in the UK and therefore the market cap could rerate pretty significantly. And the downside I think is protected because there are some large US cash rich companies who have said that they would like to get into food retail who would view this as a very quick start, I think to the UK market.
Black: Well, thank you so much for your time.
MacInnes: Thank you.
Black: And thanks for joining us.
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