Holly Black: Welcome to Morningstar’s “3 Stock Picks”. I'm Holly Black with me is Margaret Lawson. She's Manager of the SVM UK Growth Fund. Hello.
Margaret Lawson: Good morning.
Black: So you're going to talk us through three stocks in the portfolio today. Where would you like to start?
Lawson: I would like one is fairly relevant just now is probably Ocado. So, Ocado is a retailing platform, but it's more a technology stock more than anything else. And this is a business that's actually been around for almost 20 years, but it's really now -- it's really Ocado’s day here. So Ocado is really digital platform for groceries, that's really it. But the point is, it's about - it's a unique resource model and the scalability of the model. That's what's really important about it. And in recent years, it's actually, the technology has been endorsed because it now has, it customers in the UK, it has customers in Canada, customers in France and even US has probably been the biggest opportunity.
So really Ocado is a technology platform for ecommerce. And it's all about scalability of it. And within Ocado, there's also an incubator business for all the stuff, new technologies, which it should be able to leverage. And you can even move into new verticals out with and just some grocery. So we really think there is significant growth ahead for Ocado, as it moves into new territories as it rolls out technology. Because as it rolls out this technology, it's able to scale the cost of that technology, and cash flow increases, the returns on capital increases as well. So we actually think over three, five year periods there it's going to significantly outperform.
Black: So you are a growth investor cruising the line with the firm. Ocado has been on a really good run for several years. How do you decide when to keep running a winner like that and when to start taking profit?
Lawson: It is very difficult particularly. But actually, when you're valuing a stock, it's all about the discounting the long term cash flows, and any change in news, for example, like, for example, Ocado doesn't have a presence in Germany and also in parts in Asia. So if it was to get a contract there and execute well, you know, when you factor that into the model, you’ll have significance of long term value. So you've got to, you've got to really keep the remodeling in.
Black: Okay, what is stock number two?
Lawson: Stock number two, it again plays into the theme that we've been talking about a little bit working from home and about communications. The company is called Gamma Communications. Gamma has risen really as a result of the ineptitude of British Telecom over the years. And what it does it provide some communications and telecommunications services to small and medium sized businesses. So this one is really got great momentum about it invests in its products, its value, its channel retailer, it has very good visibility in its income. And again it’s well invested business and new opportunities internationally. So, again, good margins, great growth ahead on Gamma Communications.
Black: What’s your final stock?
Lawson: The final stock is a bit more off the wall is Games Workshop. Games Workshop, what it does is it makes some fantasy models, right. It’s a hobbyist type business, right. And the brand is more hardware and it’s really more stuff for gamers and people who like to build models. And the models are very expensive and very great margins. It has a loyal community and that community has expanded rapidly over recent years as a result of social media and YouTube videos. And business is a low cost business it operates out of Nottingham where it manufactures and distributes and designs the models. And then it distributes it to independent retailers, as well as it has its own shops, but it's actually the franchise. It's all about the IP and the franchise and this franchise is now being made into video games, and into books and comics. And it may even end up as a film franchise and you've got the royalties and leveraging the IP on top and that's the opportunity. Again a business with no debt and great cash flow to reinvest in its core position. So I think that has a great runway ahead of it as well.
Black: Margaret thank you so much for your time. For Morningstar I'm Holly Black.
