3 European stock picks for 2020
Unloved cable companies and property firms provide some of the best opportunities in Europe, says T. Rowe Price's Dean Tenerelli.
Holly Black: Welcome to the Morningstar series, "3 Stock Picks." I'm Holly Black. With me is Dean Tenerelli. He is manager of the T. Rowe Price European Equity Fund. Hello.
Dean Tenerelli: Good morning.
Black: So, you've got for us today three stock picks for Europe for 2020. Where would you like to start?
Tenerelli: OK. The first one I'll start with is Prysmian, which is an Italian cable company, which is really a global business. Cable sounds very, very boring. But as with most of what I do, we really do look for companies with good barriers to entry and moats and Prysmian supplies cables across different industries, a lot of which are very high tech, telecoms and energy, high voltage cables, this kind of thing, underground, undersea cables. And the company had a bit of a glitch last year with some quality issues in its cables and the stock was sold off a lot. That combined with a slowdown in the industrial segment also caused the stock to get very sold off. So, it's very, very cheap now, trading on 11.5 times P/E, 8.5 per cent free cash flow yield. And I think it's a screaming buy. We have a decent size position in it. We've increased the position through the year. And it's a high conviction idea for me.
Black: Is the fact that it's in Italy also playing against it as well, because that's quite an unloved area for investors?
Tenerelli: It is and at times it has penalised the company a bit, but really the percentage of revenues in Italy is something like 2 or 3 per cent. So, it's not an economic concern for the company, but sentiment sometimes get influenced. But that's an opportunity because the company will deliver its earnings.
Black: Super. OK. What's stock number two?
Tenerelli: Stock number two is a very different one. I'll choose Great Portland Estates, which is a property company in the UK.
Black: You've just sent alarm bells screaming.
Tenerelli: It's true. Property has been – especially, since Brexit there's been a lot of worry and in fact, Brexit has caused the slowdown in new capacity or new supply coming on stream in UK property, which is precisely the opportunity because Great Portland has a great positioned estate which is located in and around Oxford Circus, mostly and you're seeing a lot of investment and demand there from high-tech companies like Facebook and Google that are taking up a lot of office space. So, actually, their rental increases we expect to be 4 to 5 per cent going forward which doesn't seem like a company with any sort of problem or a slowdown, does it? And it's trading at book value. And the other interesting part is that they're beginning to also expand their supply slightly in central London. So, we're going to start to see a bit of growth in the assets that the company have. It's top, top management, and they have a very good portfolio of businesses. So, I really like the stock.
Black: And is it office space you particularly like, because obviously some property funds are more focused on retail or industrials?
Tenerelli: Yeah, for me, well, office is much, much preferable to retail. So, they don't do a lot of retail. And so, you're not having that sort of malaise of how the internet is affecting the business and stuff. So, it's pure office, so it's pure economic demand kind of thing in many different segments.
Black: Super. OK. And our final stock?
Tenerelli: Final one is a very high tech, a company called Thales which is a defense contractor and they make systems for aerospace, for airplanes, for cockpits, both private and government defense, communication systems, very high-tech satellites, very high return on capital employed. You're talking 30 per cent type business. They had a problem this year in their satellite business. And in general, commercial satellites have suffered a bit with different problems in the industry. And so, they've had fewer launches than they had hoped for and fewer sales. That caused the stock to come down. They don't generally miss numbers, and they did this year. But we're very secure that, even starting next year that they can meet their 3 to 5 per cent revenue growth targets, again, with very high profitability. Super barriers to entry based on their top technology. So, I like this stock a lot.
Black: It seems like you're looking for shares that have fallen out of favour that you think are due to turnaround. Is that a bit of a theme in the portfolio?
Tenerelli: I think it is. I think partly it depends – it's a function of also where we are in the markets, like a lot of stuff has been bid up, a lot of stocks are overvalued. With the backdrop of QE and a lot of liquidity in the market, you're finding that all of the equity markets are pushed up. So, I think you really need to look for areas where things have come off for a certain reason. And that's where you're finding value. I mean, we're sticklers for DCF, for evaluation. We don't want to buy stuff that's expensive. So, yeah, I think at this point in time, I am seeing a lot of stories like that.
Black: Well, thank you so much for your time.
Tenerelli: Thank you.
Black: And thanks for joining us.