Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Rachel Winter. She is Investment Director at Killik & Co. Hello.
Rachel Winter: Hi, Holly.
Black: So, you've got three stock picks for us, and I think it's clear what's on your mind at the moment, because these all have a sort of post lockdown theme. Where should we start?
Winter: They do. We are feeling quite optimistic today. So, we've got three stocks that should benefit from the economy starting to open up again. Let's start with Airbnb (ABNB) because I can't think of a better company that will benefit from the reopening of the economy. So, I think this needs no introduction, but Airbnb is an online platform that connects guests and hosts and allows private property rentals. Airbnb collects about 15% of the revenue from each rental and the company is just growing so quickly and we think that will continue to happen as the economy starts to reopen.
Black: Now, this is fairly new to market. So, how do you feel about IPO stocks and the hype around those?
Winter: It is fairly new. It has certainly IPO-ed within the last year. We have seen a well-mixed reaction to IPOs over the last year. Some have spiked incredibly highly on their first day of trading and others have been less successful. So, I think you really have to take them on a case-by-case basis. But having looked at Airbnb, yes, we do agree that the valuation is currently quite high, but we do think there are reasons for that, and we still have confidence in the continued growth of the company.
Black: Okay. And stock number two?
Winter: Stock two is Diageo (DGE), which is one of the biggest drinks companies in the world. So, clearly, Diageo has had quite a difficult year with all these pubs and restaurants being closed. But we hope that will turn around now that the economy is starting to open again. Diageo is more exposed to spirits than it is to beers, and that's definitely a good thing because spirits are becoming more popular in relation to beers. And what we also find is that spirits are becoming more popular in emerging markets. And because emerging markets currently have quite young populations, we are expecting a big increase in the number of people of legal drinking age over the next decade. So, according to our research note, we expect 600 million additional legal age drinkers to come onstream in the next 10 years.
Black: So, obviously, pubs reopening is good for brewers. But actually, these have also been some of the winners of lockdown, because we're all trapped at home and apparently drinking more, aren't we?
Winter: Very true. So, drinking has definitely picked up at home. What you find with drinking at home is that the packaging costs a lot more for these companies because they have to package their products individually. Whereas with a bar or a restaurant, they could just send a big keg or a big bulk supply of these alcoholic drinks. So, there is a bigger profit margin when they are supplying to bars and restaurants.
Black: Okay. I've got my beer. I've got my B&B. What's my final stock?
Winter: The final stock is BASF (BASF), which is a massive chemicals company and it makes the raw ingredients for so many different things across so many industries. And so, for example, shampoo. It makes the soles for sports trainers. It's involved in aviation, the automotive industry. It really is a very varied company. But where it has really suffered over the last year is in automotive and aviation and we do expect those industries to pick up once more now that lockdown is starting to ease. So, we think that Basf is well-positioned to recover.
Black: And is being involved in so many different industries act as kind of protection for a company like this?
Winter: It does because it's so diverse and you would hope that if one sector is suffering and one isn't doing particularly well, then hopefully this company will have exposure to other areas that can prop it up in difficult times. And that's something that we certainly have seen with Basf over the last year. Yes, the automotive and aviation industries have suffered, but other areas, for example cosmetics have picked up. But we do hope that the share price will pick up even more once these automotive and aviation industries start to recover.
Black: Rachel, thank you so much for your time. For Morningstar, I'm Holly Black.
