A trio of growth stocks

-- | 13/07/2020

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Holly Black: Welcome to Morningstar's 3 Stock Picks. I'm Holly Black. With me is Rachel Winter. She is Investment Director at Killik & Co. Hello.

Rachel Winter: Hi, Holly.

Black: So, you're here for our monthly virtual catch-up with three stocks you're quite positive on at the moment. Where would you like to start?

Winter: Let's start with Facebook, obviously, a leading global social networking platform, owner of Facebook, Instagram and WhatsApp. There are a couple of reasons why we like Facebook. One is the growth in online advertising. So, over the last few years, we've seen a huge movement in advertising spend away from traditional media and towards online platforms and we believe that the coronavirus has really accelerated that. And recently, we've got to a point where consumers are spending just as much time on their mobiles as they are watching TV. So, we think there's a huge potential there for more online advertising.

The reason we like Facebook right now is the announcement of this new Facebook Shops initiative. So, as of now, small businesses will be able to sell directly to their Facebook and Instagram followers via Facebook Shops. So, we think this will promote even more advertising from smaller businesses on the Facebook platforms.

Black: But Facebook has had a couple of controversies, hasn't it? So, do you think there is a risk that people get bored of that brand and don't want to shop and socialise and have all of their data running through the same company?

Winter: I don't think that's such a risk. I think there clearly is a movement away from the original Facebook platform but we're seeing Instagram picking up all of those followers. So, there is a transfer away from Facebook towards Instagram. So, I'm not particularly concerned about that. You did mention the controversy and that is a concern. I think there is perhaps some concern that Facebook could have done more to crack down on illegal or concerning content on its platform. But I think that concern is very much in the price. Looking at the valuation of Facebook, if we account for the big cash holdings that they have, the valuation on a price to earnings basis is about 20 times based on next year's expected earnings. And that I think is very low for a company that's growing its earnings over 20% per year.

Black: Okay. What is stock number two?

Winter: Stock two is Visa, so a very well-known card network. Visa is essentially operating a duopoly with MasterCard. So, those two companies really dominate global card networks. And I think because Visa is so established, it would be very difficult for another company to come in and do exactly what Visa does. So, that's definitely a positive. And the reason we like Visa is that we are seeing a continued growth in digital payments and we are seeing a continued movement away from cash. And we think that's going to accelerate again because of the coronavirus because people don't want to handle cash because it's seen as unhygienic. And I think here in the UK we are very used to having these digital payments, but there are still over 1 billion in the world who don't even have a bank account yet. So, there is still a very big opportunity for digital payments to grow even further.

Black: And we have seen payments providers in the headlines recently with the Wirecard scandal. Do you think incidences like that actually consolidate Visa and MasterCard's position?

Winter: I think what they do is actually quite different. So, Wirecard was payment processor. PayPal, for example, as well is a payment processor. What Visa and MasterCard do is operate the payment networks. So, the processors like PayPal would have to send a message through the card networks to the merchant bank and to the consumer's bank to make sure there's enough money there and to help that money move to the right place. So, what Visa and MasterCard are really doing is just operating the kind of electronic messaging system that enables that processing to take place. So, I don't think there's the same risk there as there is with the companies that are actually processing the payments.

Black: Okay. And our final stock?

Winter: Final stock is MSCI which is a big American financial services company. The reason we like them is that they are a leading provider of indexes. So, for example, if you want to use the MSCI World as your benchmark, you would have to pay MSCI for that data. And what we're seeing at the moment is that investors are increasingly keen to invest on a more global basis and that has increased demand for global indices, again, like the MSCI World. We're also seeing an increasing demand for passive or ETF investment strategies and again, that creates more demand for indices like the MSCI World. And finally, MSCI is a leading global provider of ESG research and ESG indices. And because of the increasing demand for this type of investing, we think MSCI will do well from this as well.

Black: Why do companies have to MSCI for that data because it's fairly easily available you would have thought?

Winter: It's easy to find online but you do have to pay in order to use that data yourself. So, if I'm a fund manager and I want to publish a fact sheet that goes out to my investors with MSCI's data on there, I would have to pay MSCI for that data.

Black: Rachel, thank you so much for your time. For Morningstar, I'm Holly Black.

This report appeared on www.morningstar.com.au 2022 Morningstar Australasia Pty Limited

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