Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Rachel Winter, she's Investment Director at Killik & Co. Hello.
Rachel Winter: Hi, Holly.
Black: So Rachel, quite often you and I look at three stocks to buy or three stocks to sell. But what we don't often consider are those one sitting in the middle, which might be more of a hold. So you've got three of those for us today. Where would you like to start?
Winter: We have. So we've got lots of stocks that are quite commonly held. And we're just looking at some of those and considering whether or not there might be some better alternatives. So the first one is HSBC, which is an absolutely a massive global bank. It's got a market cap of £83 billion and is exposed to lots of different types of banking, private banking, and retail banking, investment banking, and historically investors have liked it for two reasons. One is the high dividend which has just been reinstated, following a period of restriction by the regulator because of COVID. And the second reason is the bank's exposure to Asia, which has been historically seen as a high growth area. However, more recently that exposure to Asia has become more of a concern than a benefit. So at the moment, about one-third of HSBC's revenue comes from China and Hong Kong. But with the relationship between China and the rest of the world seemingly getting steadily worse, it's a little bit risky to continue holding a bank like HSBC.
Black: So it might be worth reviewing, if you do hold that in your portfolio. What is stock number two?
Winter: Stock number two is Unilever, which again is a very commonly held stock. It's one of the biggest names in consumer goods. And it's got a very, very long track record of being very successful. However, if we look at the stock more recently, it really has underperformed the wider sector. And in fact, the share price now is below where it was back in 2017. So it really has been quite disappointing. And part of the reasons for that is that it is exposed to perhaps lower growth areas of consumer goods, it doesn't really have that much exposure to the sort of prestige beauty markets, or the nutrition markets, which is where we're seeing the most innovation and the higher margins. So we have seen that Unilever shares have been significantly outperformed by competitors, such as Procter & Gamble and Nestle. So for anyone holding Unilever, it might be worth considering whether or not there are alternatives that can offer higher rates of growth.
Black: And I guess this is a good lesson for people in just because you've held something and it's done well for however long, it doesn't mean, you don't keep it under review and assessing whether it's still appropriate.
Winter: Exactly. So generally, we say that the best way to invest is to hold great stocks for long periods of time. But that doesn't mean you shouldn't be consistently reviewing them and accepting that sometimes some of these great stocks might need to be replaced.
Black: Okay, what's our final stock today?
Winter: The final stock is TotalEnergies, which previously was just known as Total. It's one of the biggest oil and gas companies in the world. It's based in France. Historically, again, it's been popular because of the dividend. And in fact, it was previously seen as one of the highest quality oil and gas companies, with much less debt than its competitors. So it has been quite popular with investors. It's actually performed relatively well throughout the Coronavirus crisis. And as with the other oil and gas companies, the share price has recovered very well over the last few months, because the oil price has come up so much. We currently believe the shares are fully valued. And in light of the fact that many investors hold it just for the dividend, we would point out that anyone holding French shares is going to be subject to withholding tax on that dividend of 30%. And that's going to make a big difference. So for anyone holding these shares, we would just consider whether or not there is a better alternative.
Black: So if someone is looking to remove one of these stocks from their portfolio, is it usually the case that you can do a like for like swap and find a competitor to invest in? Or is it worth getting out of a sector altogether if you find something's not performing?
Winter: Depends on the situation. So if you are really keen to continue holding oil and gas, then you could consider BP or Shell which aren't subject to that big withholding tax. Or if you are keen to reduce your exposure to oil and gas bearing in mind the sector has had quite a strong run recently. Then you could look at other areas of the energy market, for example, renewable power, which is becoming a lot more popular.
Black: Rachel, thank you so much for your time. For Morningstar I'm Holly Black.
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