Holly Black: Welcome to Morningstar's 3 Stock Picks. I'm Holly Black. With me is Rachel Winter. She is an Investment Director at Killik & Co. Hello.
Rachel Winter: Hi, Holly.
Black: So, I feel like your monthly virtual visit to us is a good barometer of where we are at in this whole pandemic. And considering where we were a month ago, markets are quite jubilant. So, you are finding three stocks picks within that. Where would you like to start?
Winter: Yeah, you are right. It's surprising how high markets are at the moment and it's almost becoming quite difficult to pick stocks that we think still are trading at attractive levels. But the first one we are looking at today is a company called Newmont Mining which is the biggest gold mining company in the world and it's the only gold mining company in the S&P 500.
Why do we like it? Well, gold has come up over 30% over the last year. It's now trading over $1,700 an ounce and that means that gold mining companies are profitable at these levels. And why has gold come up? Well, firstly, it's a safe haven. A lot of investors like to buy gold when they are worried about equity markets and when the equity markets have been particularly volatile. But gold is also a very good protection against inflation. And while we haven't got inflation at the moment and it's unlikely we'll have an inflation in the short term, if we look over the longer term, because central banks have been printing so much new money and pumping that into the markets to help support the economy, a lot of investors believe that that printing of money will lead to inflation over the longer term. And that's one reason why people have been buying gold.
Black: But gold can also fall in price when people are feeling more optimistic. So, if this stock market recovery continues, does that affect their outlook?
Winter: Difficult to say. But I think you could have a situation where you have the stock market recovery continuing but also you have inflation as well. And I think as long as inflation remains high, that would be a positive for the gold price. And also, I think a lot of these gold mining companies are very profitable when gold is at $1,200 an ounce. So, we have got a lot of margin there for gold to fall a bit and for these companies still to remain profitable.
Black: Okay. What's stock number two?
Winter: Second one is Nike which is the biggest sportswear company in the world. Sportswear has been quite a trend over the last few years, but it's really accelerated during lockdown because exercise is one of the freedoms that we've had. So, people really have taken advantage of that. And I think a lot of sportswear companies have actually done quite well. Nike in particular has done well, firstly, because it's got a very good online community through all of its fitness apps. So, it's kind of used those apps to reach out to its current community and help it to sell more products. And also, this lockdown has helped Nike to kind of accelerate its current strategy which was always to sell more things online. So, historically, Nike has sold a lot of items through third party retailers and department stores and it has always wanted to sell more things online. So, it can sell directly to consumers and take all that profit margin for itself. And this lockdown has really forced people to buy more online. So, it's actually been very good for Nike.
Black: And what's the distribution of a company like Nike? Do they fulfill that for themselves or do they farm that out to someone else?
Winter: They do a lot of it themselves and they are starting to do more of it themselves. And actually, one other thing that's really benefited them is all the automation they use in their factories. And so, their factories are no longer as people focused as they were in the fast and having all that automation has actually really helped them to deliver the product that they need to deliver during this lockdown period.
Black: Okay. And what is our final stock?
Winter: Final one is a Japanese company called Keyence. And actually, it almost relates to Nike because it is a company that provides factory automation. So, at the moment, with all this difficulty between China and the rest of the world because of the coronavirus, we feel it's quite likely that a lot of companies will want to remove their supply chains in their factories from China and they would probably want to move their supply chains to more developed countries or economies and in those countries you're likely to have higher wages. So, we think it's quite likely that within these new factories in these countries companies will want to take more advantage of automation, so they don't have to pay as many wages. So, Keyence is a world leader in factory automation, and we think the demand for this is going to increase as companies look to change their supply chains.
Black: Yeah. So, this is a trend that has been growing but there is kind of some tension there because people think, oh, you know, robo is stealing my job. So, is this a sort of situation where coronavirus accelerates an existing trend?
Winter: I think sadly it is. And obviously, the loss of jobs is a key concern here. But I think if you think of companies like Amazon, they are very heavily criticised for the poor treatments of workers within their factories and sadly, for the jobs market I think probably the easier solution for Amazon is to automate more of their factories so treating those employees isn't such a concern for them.
Black: Rachel, thank you so much for your time. For Morningstar, I'm Holly Black.
