Holly Black: Welcome to Morningstar's 3 Stock Picks. I'm Holly Black. With me is EdenTree's Philip Harris. Hello.
Philip Harris: Good morning to you.
Black: So, you are talking us through three stocks in your portfolio that you are pretty excited about at the moment. Where would you like to start?
Harris: Right. First stock we'd like to introduce is a little U.K. software company called Actual Experience. This is a U.K. software company that has proprietary patented technology that analyzes digital networks, and it shows you where companies can put incremental resource in to deliver significant cost savings. So, this has been a great business over the years, but the use of home working, that movement to home, has transformed the business. It's now a sale not just to the IT departments but to the human resources departments as well. So, it goes to health and wellbeing. So, not only it saves companies money, it enables us to work from home and to look how our networks actually do.
Black: And I find that exciting because we don't get many tech businesses in the U.K. So, how has this one stayed under the radar?
Harris: Well, it's lovely little business that was started by some guys from the university. It's been funded by the markets for about the last six or seven years. And I agree, yes, there aren't many U.K. stocks like that. But what happens is, they tend to get to a certain size and then sell. This is a relatively small company. It's only 70 million market cap. I think if it is incredibly successful, then maybe sadly it will sell out. But it's under the radar at the moment. It's one not many people know about, and therefore it's very exciting and interesting business.
Black: Okay. What is stock number two?
Harris: Stock number two is a company called Diaceutics. Now, this is a Northern Ireland-based company founded by a guy who has been in the industry for a long, long time. It's a play on precision and personalized medicine. So, we all know that drugs given to everyone can have nasty side effects, cannot work. So, the industry is moving towards personalized medicine where the drugs they give you should actually work for you. That requires huge amounts of testing in laboratories and Diaceutics are essentially the middleman between the pharma company and the laboratories, and they work with both sides to make sure that the drugs have the equivalent tests and that they actually work. And therefore, they gain a multiple number of revenue streams and also pick up patient records. So, a wonderful play on health and wellbeing on personalized medicine.
Black: Now, obviously, there has been a lot of investment in pharma and medicines over the past year, but all COVID related. How does that affect this company?
Harris: It has slowed their growth down, to be fair, for the last year. They have obviously suffered because clinical trials and a number of other things have been slowed down. But the long-term secular trends are still there. So, last year, for example, about 40% of medicines that went through the FDA were actually for these personalized medicine types. So, we expect a massive and very quick pick-up once the pandemic goes. So, the long-term sector trend is extremely strong after quite a difficult year for the company.
Black: Okay. And what's our final stock?
Harris: Final stock is a little company called essensys. This, again, goes to the flexible working market. Again, it goes to health, wellbeing, the changes in the way we all work, and these guys actually supply a range of software products that enable property owners to convert their existing property stocks to flexible offices. So, again, as we've said before, companies will need more flexible office space. We are not going to go back into a normal office environment. But for existing property owners, setting up that flexible model is incredibly difficult, requires very specialist software, and these guys are the world leaders in it. A very small, again, U.K. software company that's leading the world in this operation.
Black: But to invest in this company, do you have to believe that we won't ever work in the same way again? What if we suddenly flip reverse and went back to the office full time?
Harris: Yeah, I mean, I think we will obviously go back a percentage of time, but I think the long-term trend of working more flexibly is still there. If you look at people like JLL and some of the other property specialists, they are saying that the market will go from around 5% to 20% to 30% of the office stock. So, you don't have to believe that everyone will work from home forever. It's just that the market is changing. It's the quantum of that change that will drive that. What we know is it's a multiple of the existing stock and these guys supply, say, existing property owners that need to convert some of that and they are here, the UK, in the U.S., they're in Australia, they're in lots of other Far East companies as well. So, there's lots of opportunities for that business to grow.
Black: Philip, fantastic. Thank you so much for your time. For Morningstar, I'm Holly Black.
