Holly Black: Welcome to Morningstar's 3 Stock Picks. I'm Holly Black. With me is Paul Niven. He is Manager of the BMO Universal Balanced Fund. Hello.
Paul Niven: Hello, Holly.
Black: So, you're going to talk us through three stocks in the portfolio you're feeling positive on at the moment. Where would you like to start?
Niven: So, PayPal is a stock which we like. It's obviously performed very strongly recently gaining over 100% in 2020. But one thing with the secular backdrop which we see globally, we see sustained rise in e-commerce, due to this, the ongoing need and rising demand for safe and secure payment systems. Within the context of Covid in the last 12 months, businesses, especially smaller businesses, have had to adapt to online retail very rapidly and a safe, secure, reliable payment process which is delivered by PayPal has been really crucial for those businesses over the past year. So, PayPal has proven its worth from a business perspective. And when you couple that with the ease from a consumer perspective, they've really capitalized on the increase in ecommerce globally. In addition to those secular drivers I'd also say from a sustainable perspective that PayPal place a strong emphasis on financial inclusion around the globe and from a conduct perspective, they've made strong environmental commitment targeting 100% renewable energy in data centres by 2023.
Black: Oh, I didn't know that. That's really interesting. Okay. What's stock number two?
Niven: So, the second stock, which I'd highlight is TSMC, also a stock that has performed well, delivered around 60% returns in 2020, and this is held on our sustainable funds. TSMC is a high-quality chip foundry business. The world's largest producer of semiconductor chips in an industry with relatively few competitors, and we find that attractive, obviously less competition, more pricing power. It's got a wide operational moat, driven by the technological challenges of producing smaller and more powerful chips on an ongoing basis. I think a good example of the moat and affirmation of the moat was basically Intel recently effectively calling time on their competition in this segment of the market, indicating that they were likely to step back from chip production and only focus on design. Now, to be fair, that could reverse under the new Intel CEO, but it's clear evidence of the operational strength of TSMC relative to peers. And again, I think it's a good example by COVID has only accelerated long-term mega trend towards digitization and TSMC is critical in any number of sectors from phones to cars, and that will only increase again with the increasing demands of a more digital life going forward. We do think volumes are going to increase and more content into more connected devices from autonomous electric vehicles through to connecting smart home appliances.
Black: Okay. And what's our final stock today?
Niven: So, the final stock is Smurfit Kappa. It is the largest recycling packaging company in Europe. It's also got a strong position in Latin America and the US They produce cardboard packing from what's Virgin Paper, where they control essentially all aspects of the process. They control the forests; ensure they are managed sustainably. They also produce from recycled paper where they've got very strong control of the value chain from wastepaper through to boxes and cardboard. In the last 10 years, this industry has really consolidated very considerably in Europe which has followed on from what's happened in the US and that's led to a consistent rise in return on capital despite what's been, to be fair, relatively lackluster top-line growth for much of the past decade in Europe. Now, looking forwards, we're more optimistic in terms of that top-line growth picture due to more innovation which Smurfit really lead the way on in terms of use of shelf-ready packaging for cardboard displays for stores. Ecommerce – the growth in ecommerce, again, has very significantly increased the need for boxes. Demand for greater sustainability – a piece of cardboard packing can be recycled 5 to 7 times from Virgin Paper before it becomes too weak. And they've worked hard to show clients how paper-based packing can be used to replace other types of packaging. And directly linked to that last point, we are seeing plastic clearly being replaced with recyclable packaging, of which paper is one solution. So, the result is that for Smurfit we think rising profits and cash flow for the next decade to come.
Black: Paul, thank you so much for your time. For Morningstar, I'm Holly Black.
