Holly Black: Welcome to Morningstar's 3 Stock Picks. I'm Holly Black. With me is Jamie Ward. He is Manager of the Crux UK Core Fund. Hello.
Jamie Ward: Hi.
Black: So, you've got three stocks to talk to us about today. Unsurprisingly, they are all UK-based. Where should we start?
Ward: Let's start with Breedon Aggregates which is probably one that fewer people have heard of out of the three that I'm going to talk about. Breedon is an Aim-listed business. It runs quarries and some manufacturers and that kind of thing across the UK and Ireland. Why I quite like it as a business is, firstly, it's very, very well run. What's very interesting about them is, they're very, very well invested and I think we've gone through a period over quite a long and more years now where people are disinterested in businesses that are fixed capital intensive because people like capital. But the interesting thing about having a fixed capital intensive business is without making a bet on the macro perhaps if we end up with a kind of inflationary environment in the future then these sorts of businesses make quite good inflation hedges and this is even more so the case with somebody like Breedon because they are effectively sort of small quasi local monopolies. If you think about what they sell, which is basically rock, you can't very well source your rock from Spain or wherever it happens to be just because the rock is cheaper on the site because the cost of transportation is the really big thing. So, Breedon is a really, really interesting business because it's well run, and it can sort of offset some potential risks out there like inflation.
Black: Okay. What's stock number two?
Ward: Stock number two is one that I think people have more heard of which is Barclays. Obviously, banks are very un-favoured, and I think Barclays in particular because it was one of the big ones. It was sort of part of the epicenter of the Global Financial Crisis in 2008. It absorbed Lehman Brothers which was pretty much the poster boy for the Global Financial Crisis. But for all of that it's a very, very different business in 2020 than it was perhaps 12 years ago which was maybe the last time that a large number of investors were paying a lot of attention to it. But when you're paying half the value of the equity for a business I think can generate 10% return on equity, just the basic dividend on its own would theoretically in the future be something like an 8%, growing at maybe 4% per annum and I think that's extremely attractive once those dividends start coming through.
Black: Well, of course, you talk about dividends there, but the banks currently aren't allowed to pay them. When do you expect to see that dividend reintroduced?
Ward: Well, it somewhat depends on exactly how the recession plays out caused by the sort of lockdown – or the Covid and the lockdown. I think they have the capability of paying now. And I think if the FCA allows them to restart paying, they will restart paying in 2021 which is at present is when they are expected to do so.
Black: Okay. What's our final stock?
Ward: The final stock is a company called Renishaw. Renishaw is slightly different to the other two in that it's not particularly cheap. The way I run money is – once I come across sort of a selection of about 25 to 30 stocks that I think are very good businesses in that they can become more valuable over time, I'm reluctant to completely get rid of one when it gets quite expensive. In the case of Renishaw, typically I'd have maybe a 4% weighting. Right now, it's more like 1.5% and that's because it's so expensive. The thing about Renishaw is it's probably the most sort of global innovative type business we have in the UK It's got a 50%-odd holding from the founders. It owns somewhere in the region of 1,500 patents on various really interesting parts of technology that are potentially very big in manufacturing and also actually in surgery. So, they make sort of surgical equipment. For that right now, as I said, you are paying quite a lot – it is up 110% since the market low. So, it's sort of – it's doubled in the last four months. I would always be very reluctant to sort of get rid of the business purely because of valuation grounds and if it does weaken at all, I will be rebuilding that one.
Black: Jamie, thank you so much for your time. For Morningstar, I'm Holly Black.
