Holly Black: Welcome to Morningstar's 3 Stock Picks. I'm Holly Black. With me is James de Uphaugh. He is Manager of the Edinburgh Investment Trust (EDIN). Hello.
James de Uphaugh: Hi.
Black: So, you've got three stocks for us today from the portfolio. Where should we start?
de Uphaugh: Well, should we start Weir (WEIR)? So, Weir is a business which has now following the sale of its shale assets, is very much focused on this amazing minerals technology business. And if you think about the issues in the mining industry at the moment, on the positive, they are really profitable industry. So, you've got to make sure that you're really producing full tilt, but the downside is you've really got to be very careful of your carbon footprint. And this is exactly what Weir addresses. Its products reduce water and energy usage and it's kind of the razor blade model, if you like. So, it's selling spares. That's where it makes all its margin. So, the sale has revealed a peach of a business in minerals technology, which is going to really generate good compound revenue growth. And actually, whilst it's not given away, it's very much one I've added to over the last quarter. So, Weir would be my first pick.
Black: And how difficult was it for Weir to shed that part of the business? What was the market's reaction to that?
de Uphaugh: Yeah. Well, it's very interesting because Weir was conventionally a bit over geared at that stage, and that's partly why it sold the business. But I think it speaks volumes for the quality of Weir's business that the buyer was none other than Caterpillar. So, Caterpillar buys good-quality businesses, and remember, this is the lowest-quality most cyclical business in Weir, and that's the one they bought. And it just emphasizes the quality of the rest of Weir's business.
Black: Okay. What's stock number two?
de Uphaugh: Well, stock number two I think is Tesco (TSCO). Tesco is interesting because it's been frankly a bit subdued over the last year. It's had to absorb a number of things that being profit downgrades relating to the bank, the COVID costs of operating supermarkets, the fact that they paid back the business rates and also the change of leadership at the top. So, on the face of it there being one or two things which have held the shares back. But actually, if you look closer, and the last set of results were really good illustration of that, actually, the brand dynamics are superbly strong. So, they gain customers from all the major (indiscernible). So, they're gaining market share, and I think that's things like the Aldi price match which is working. It's also things like Clubcard price match, which again is good. So, key gaining share. Competitively also, their competitors are in less strong shape year-on-year. So, Asda has got a new owner, out goes Walmart, in comes private equity. I know which one I would prefer to compete against. Then you've got the discounters. The discounters, their P&L has gone down. So, competitively, they're in a stronger place.
Black: Okay. And on to our final stock.
de Uphaugh: Yeah. So, the final one is one of our overseas stocks, and that's Newmont Mining (NEM). So, this is a gold miner. And so, this is a good way of playing the not trivial risk that actually transitory inflation becomes entrenched inflation, okay? Now, combined with that, you've actually got the fact that the gold industry has been consolidating and what that's meant is that mine supplies gone down whilst demand is beginning to come up. We've seen central banks buying, we're seeing Indian consumers, Chinese consumers. So, you've got the classic supply down demand up. Elementary economics equals nice price tension. Then if we zero in on Newmont itself, it's the (weighted) player I think because 85% of its assets – over 85% of its reserves were in good jurisdictions, North America, Australia. It's got a very strong management team led by Palmer with good safety record, good community relations, next to no debt. Really, what's not to like, actually?
Black: James, thank you so much for your time. For Morningstar, I'm Holly Black.
