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Killik's 3 Stock Picks for February

Emma Wall

Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and joining me today to give her three stock picks is Rachel Winter from Killik & Co.

Hi, Rachel.

Rachel Winter: Hi, Emma.

Wall: What's the first stock pick today?

Winter: So, the first one is a company called UnitedHealth Group, which is a huge American healthcare company. They are predominantly a healthcare insurer. So, just over half of their revenues come from the insurance business. And I think that's good because we do have an aging population. People are needing to spend more on healthcare and for that reason, healthcare premiums are going up.

But the main reason we like UnitedHealth Group (UNH) is because of their technology and data business which is called Optum. So, that accounts for about 43% of their revenues. And this is where we think all the future growth is going to be.

So, because UnitedHealth Group is so big, that means they have a huge amount of data on patient outcomes and what treatments will be the best for particular groups of patients. So, they are able to look at patients with a particular illness, for example, diabetes, and they can see what patient groups with what drugs had the best outcome.

And they have been able to use that to prove that certain very cheap types of medication and drugs were much better than some more expensive ones. And they can use that data to go to drugs companies and force them to bring their prices down. And we have seen evidence of that in real life.

Wall: What's the second stock pick today?

Winter: Second one is the biggest beer company in the world. So, it's called Anheuser-Busch InBev (ABI). It's based in Belgium. Absolutely massive company. You might have seen it acquired a very large company called SAB Miller last year. We are still seeing the synergies of that deal going through.

So, we think there are further cost savings to be had from the merger of these two businesses. Furthermore, since acquiring SAB Miller, AB InBev has got a much bigger presence in emerging markets and that's where we think a lot of the future growth is for the beer market, particularly in Africa. So, we think now that AB InBev has a bigger presence there, it will have a better rate of future growth.

Wall: Now, that's not a company that's been without scandal, is it? It was hit by a bribery claim a couple of years ago and had to pay quite a hefty fine?

Winter: I think bribery unfortunately is going to be something that affects many, many companies that do operate in emerging markets. And I think to some extent investors do take it on the chin and they do realise that it has happened a lot in the past to many companies operating in emerging markets. We have seen it GlaxoSmithKline; we've seen it with Petrofac; we've seen it with huge numbers of very, very large companies. So, I think, sadly, to some extent, it is to be expected, but at least the regulator is looking at it and at least, this particular incident has been sorted out.

Wall: What's the third stock today?

Winter: The last one is one that I think is quite topical at the moment. So, it's JP Morgan (JPM). It's the largest bank in the U.S. We like it for three reasons. One is that U.S. banks still look relatively cheap in terms of valuation post the financial crisis. And the second one is that because we are seeing rising expectations of inflation and interest rate rises in the U.S., that's going to be good for two parts of JP Morgan's business. So, the first one is the retail business. If interest rates are going up, that means JP Morgan can charge more for loans and mortgages. So, that's the second reason why we think the company will do better in the future.

And the third one is that investment banks and particularly, the trading arms of investment banks have done particularly poorly over the last few years, because volatility and volume going through the bond markets has been so low. But now, we ae starting to get a rise interest rates. That will start to cause a sell-off in bonds and it should cause more value through the bond markets and that will be very good for the trading arm of JP Morgan. So, that's why we like that particular stock.

Wall: Asset managers like JP Morgan are often called a play or a leverage play on the economy. Does the fact that you are picking JP Morgan today mean that you feel positive about the economic outcome or outlook for the U.S.?

Winter: We do, definitely, for the next couple of years. We think, the U.S. economy is doing very well, and we think that will continue to be the case for the short-term at least. JP Morgan, yes, it is an asset manager and as you say, because it does have assets under management and it's charging a percentage of those assets as a fee, the more those assets are worth, the better it would do.

But that's not the largest part of their business. They also have a huge investment bank, huge on the trading side and a huge retail bank as well. So, there are many, many strings to the JP Morgan bow and we like it because it is a very diversified business.

Wall: Rachel, thank you very much. This is Emma Wall for Morningstar. Thank you for watching.


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