Holly Black: Welcome to Morningstar's 3 Stock Picks. I'm Holly Black. With me is Nicholas Weindling. He is Manager of the JPMorgan Japanese Investment Trust. Hello.
Nicholas Weindling: Hi, Holly.
Black: So, you're going to talk us through three stocks in the portfolio that you're keen on at the moment. Where would you like to start?
Weindling: Well, why don't we start with the biggest holding in the trust which called Keyence. It's actually been the biggest holding for us since 2011. So, we've held it for a very long time. It's a company involved in factory automation and it makes sensors that you use on production lines. And the reason why we like it so much is firstly because there's a very good structure outlook for the industry, like companies are automating more and more. Now, they might do that because they want to protect from the rising wages in China. They might automate because they're worried about their supply chain being too concentrated in a certain country and with the pandemic they might feel that even more. And you might want to automate production for health reasons. You don't want lots of people working together. But either way, there's a very strong trend in automation. Secondly, Keyence is global number one, and it has an operating margin probability of over 50% which is probably the most profitable factory automation or industrial company anywhere in the world. So, it has really key characteristics we're looking for and an extremely strong balance sheet. In fact, it could survive for 17 years without a single sale which is a bit overly strong but regardless a really strong company that looks good for the next many years.
Black: And that's crazy. It's been your top holding for 9 years. Has your top 10 positions changed much within that time or do you tend to buy and hold in that way?
Weindling: I think the things that we are trying to do to set us apart from others are, one, to hold for much longer than average time periods, trying to make the most of our on the ground location here in Tokyo. Really, what we're always trying to think is where will this company be in 5 or 10 years' time and the ideal is, we just keep holding it all the way through and fortunately, in Keyence's case, we've been able to do that.
Black: Okay. What's stock number two?
Weindling: Well, the second stock is very different. It's called CyberAgent. It has several businesses, but the main one it has is, online advertising. In fact, it is Japan's number one company in online advertising. In many markets, online advertising has been bigger than other areas for a long time now. In fact, in the UK, online got bigger than TV 10 years ago. But in Japan, it's only just starting to cross over. And so, it's still a very long growth runway, many years of growth ahead. It has other characteristics which we're always looking for. For example, the founder of the company owns 20% of the shares outstanding, a very good long-term track record. These are all things that we are looking for and we think it's a real disruptor in the industry.
Black: Okay. And what is our final stock?
Weindling: The final stock is much smaller stock. It's called Japan Elevator Service. It does what it says on the tin. It services elevators or lifts in buildings. The reason why that company is so interesting is because in Japan when it comes to lifts or elevators, only about 20% of the maintenance is done by an independent company. In the West, it's normally 50% which is done like that. If you outsource maintenance, it's 20% to 50% cheaper. Now, maintenance contracts generate very good free cash flow, very profitable, very good growth runway. These are all characteristics that we are looking for. And you can tell how resilient and defensive it is because during the pandemic everyone still had to service their elevators. In fact, the building where I live, which is a 40-storey apartment block, there was no window cleaning and lots of other things were cancelled, but they still by law have to service the elevator. And that's why you get this very attractive cash flow and growth company over many years to come.
Black: Nicholas, thank you so much for your time. For Morningstar, I'm Holly Black.
