Holly Black: Welcome to Morningstar. I’m Holly Black. With me is Alex Morozov. He is director of European equity research at Morningstar. Hello.
Alex Morozov: Hi, Holly. Great to be here.
Black: Alex, there’s plenty going on on the stock market for investors to get their teeth into at the moment. What are some of the things on your mind?
Morozov: Well, Holly, probably the most interesting thing is how difficult it is now to find great investment ideas in the world where the market performance would suggest that the coronavirus effects are going to be near-term and the market performance so far left very few attractive investment opportunities in the area we would look for them, particularly the companies with wide economic moats. The main exception here being the energy and financial sectors, but those are also the sectors where economic moats are tougher to build. There’s not that many higher-quality names in those spaces. So, while we like in general the valuations there, I think that, overall, when you’re looking for a combination of quality and price, we have to look a little harder.
Black: And those sectors do have headwinds–low interest rates, low energy prices. It seems like it would be a brave investor who took a punt right now in that space.
Morozov: Yeah, that is indeed correct. I think that when you look at the Uncertainty Rating, which is one of our staples of our methodology, a lot of the companies in the energy space in particular have higher Uncertainty Ratings, which was our lack of confidence around the cash flow generation of those businesses, in part driven by the underlying price of a commodity.
Black: So, Alex, your team keeps a list that they monitor of top stock picks. You’re going to talk us through a few of those today. Where should we start?
Morozov: Let’s start with Airbus, a wide-moat company trading at about a 25% discount to intrinsic fair value estimate. This is the company that’s definitely affected by the near-term compression in air travel. So, when you think of the air travel, you think of the airlines, but they also think of the airspace manufacturers. And while airlines are devastated by this near-term travel, a company like Airbus, where the order book is much longer in duration, is much better positioned. So, if you think that eventually the air travel might recover to the levels that were pre-pandemic, Airbus represents a very interesting name.
Black: OK. And what’s stock number two?
Morozov: Stock number two requires very little introduction. It’s the alcoholic beverage juggernaut Anheuser-Busch InBev. This is a company that has a wide economic moat in our methodology as well. It also trades at a very attractive discount, 20%-plus, and this is a company that is very well-positioned in rapidly growing demographics. So, think of developing markets like Latin America, think of developing markets like Africa–Anheuser-Busch is a household name there. It has a very strong presence in those markets. And eventually, once we see some of the rebound, perhaps in the developed markets, occur in the consumption for alcoholic beverages, the long-term trends from the emerging markets will definitely propel this stock.
Black: And what is our final stock today?
Morozov: The final stock is from the healthcare sector, which has been probably the best-performing sector outside of technology, but nonetheless we still have a few interesting ideas in this space. And the one that I would like to highlight today is Roche. This is a Swiss company that’s a leader in the oncology business, but it also has a very strong franchise in diagnostics. So, when we think of the future of medicine, which is the companion diagnostics, a medicine that’s tailored to each individual, Roche is in a really great position because it does have one of the industry’s largest diagnostic franchises. And when you look at the overall portfolio of the drugs that it has, and you look at how the market is valuing it, we definitely see a disconnect.
Black: Alex, thank you so much for your time. For Morningstar, I’m Holly Black.