3 Stock Picks for Income and Growth

Killik & Co's Rachel Winter shares this month's three stock tips; one for steady income, one to tap into electric vehicles and a biotech stock to future proof your portfolio

Emma Wall 04/01/2019
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Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and joining me today is Killik & Co's Rachel Winter, to give her 3 Stock Picks. Hi, Rachel.

Rachel Winter: Hi, Emma.

Wall: And what's the first stock you like to highlight today?

Winter: Well, first of all, we've been looking at the UK utility sector and we're quite conscious that a lot of our clients have previously been quite heavily invested in this sector because it's historically been quite safe and because the yield has been quite high. It's no longer safe because we have this threat of Corbyn and his nationalisation plans and also, some of those dividends are looking a little bit unsustainable. So, we want to sell out of that UK utility sector, and we've been looking elsewhere trying to replace that yield.

So, we've been looking at E.ON, which is listed in Germany, and is one of the largest utilities companies in the world. We think it looks very stable and back in March acquired quite a big deal with RWE and they are actually swapping quite a few of their assets, and once that's done E.ON will be predominantly focused on distributing power to customers. It won't be heavily exposed to generating power and that in our view is the riskier side of the business. So, once this deal goes through we think E.ON will be a safer business and furthermore it pays the dividend of 5.6% which we think has potential to grow.

Wall: Now UK utility stocks as you alluded to yourself are traditionally held because of their income stream and they don't offer much growth. Is this the case with E.ON, is it very much income but no growth stock?

Winter: We think it could offer growth. So, once this deal goes through the company will have a larger regulated asset base and that would enable it to grow longer term and also, we think that dividend could grow as well. So, we think that dividend could reach 7% in the next two years.

Wall: And what's the second stock you'd like to highlight today?

Winter: So the second company is a Japanese stock called Nidec and this is actually the world's leading manufacturer of motors. And the reason we are looking at this is that powering motors actually takes out nearly half of the world's electricity. So, if we can find the company that can produce those motors that are more efficient then that could really save a lot of the world's power and it could really lower the world's level of CO2 emissions. So, Nidec has been historically focused on consumer electronics but now it's moving into other areas such as electric cars, robotics, industrial automation and we think Nidec moving into those spaces could really lower the power usage of the motors in those sectors and generate a lot more efficiency.

Wall: Now, component companies such as these can be vulnerable if they are reliant on just one or two big clients for revenues. I'm thinking, for example, in the electric vehicle world, should they just be serving Tesla. Is that a risk with this company?

Winter: Not at the moment, no. I do see the point, I do see that if they are moving into electric cars, there aren't a huge number of companies producing those, and perhaps there could be some risk with them overly focusing on particular clients. But at the moment, they're looking to move into so many different spaces. So, it's not just cars; it's robotics, it's industrial automation. They'll still have some consumer electronics. They'll have some home appliances. So, I think there is enough of a range there for them not to be overly exposed to one individual client.

Wall: And what's the third stock pick today?

Winter: Third one is an American company called Thermo Fisher; and this is one that I felt is quite little known considering quite how large it is. So, it's worth about $97 billion. It's a very large company. And what it does is, it produces laboratory equipment and analytical tools for the healthcare and the biotech sectors.

So at the moment, we are seeing huge advances in biotechnology. And for us, we think that requires a greater complexity of equipment and analytical tools. And looking at Thermo Fisher, we think they have exposure to a number of very high growth areas, for example, allergy diagnostics, transplants, and even generic pharmaceuticals. So, we think there is lots of potential growth there. But also this is really a play on the healthcare sector, and that’s a sector that tends to be quite resilient. So, at a time when the market is quite volatile, it's quite up and down, having a bit more exposure to healthcare is definitely a no bad thing.

Wall: Now, biotech has been seen as quite a sexy sector and it's has been quite volatile dependent on flows and how it has fallen in and out of fashion. You said that the links to healthcare with this company meant that it wasn't very volatile, should shareholders expect a bumpy or a smooth ride?

Winter: I don't think so with this one. So, biotech to me just means early-stage pharmaceuticals. So, it's companies trying to discover the next top drug. And Thermo Fisher is producing the equipment that helps them to do that. The reason you get so much volatility with companies trying to discover the drugs is that sometimes they put loads of money into a drug that simply doesn't work. However, Thermo Fisher is supplying the equipment whether or not the drug works, the equipment is still being supplied. So, I'd expect that profit is going to be much more stable with Thermo Fisher in comparison to the companies trying to discover those new drugs.

Wall: Rachel, thank you very much, and Merry Christmas.

Winter: You are welcome. Merry Christmas to you, too.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Emma Wall  er redaktør for Morningstar.co.uk.

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