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: Hello. Good morning.
Black: So, welcome back. Time for your monthly look at three stocks on your buy list. Where would you like to start?
Winter: Well, at the moment, we're thinking that lots of governments all around the world are looking to find some way to stimulate their economies following the coronavirus, and we expect that because of record low interest rates a lot of these governments are going to borrow money and spend it on infrastructure. And that's actually an approach that the International Monetary Fund has been advocating over the course of the last week.
So, if we are going to have a big increase in spend on infrastructure, we've been looking at companies that could potentially benefit from that. And one of those is Rio Tinto. And so, that's one of the largest mining companies in the world. And it's a very, very high-quality mining company. It's a very low-cost producer of iron ore, and it's also got a relatively low level of debt compared to other mining companies and therefore, we feel is having a relatively secure balance sheet.
So, as I said, it's a big producer of iron ore and it's also heavily exposed to commodities like copper and nickel that will be required if the world becomes more electrified. So, Rio Tinto is one of the major companies we think will benefit from more spend on infrastructure.
Black: And is that kind of a less risky way to play the infrastructure trend because you're not investing in a railway company or a property company that depends on specific spending. You've just got the raw materials.
Winter: You could say that. So, you're not picking one specific infrastructure project to invest in. But having said that, infrastructure commodities are very cyclical. So, they can be quite volatile as we go through the economic cycle. So, if you're someone who doesn't want to take a huge amount of investment risk, then having a lot of exposure to commodities is probably not right for you.
Black: Okay. Onto stock number two.
Winter: Stock number two is still in this trend of spending more on infrastructure. We also expect there to be a higher level of spend on green infrastructure, so generating and distributing renewable power. So, we've been looking at a company over in the US called NextEra Energy and this is one of the world leaders in renewable power. The company really has two parts. So, one part of it is supplying electricity to the state of Florida. But the other part is developing and managing renewable generation facilities that are supplying the whole of America. And at the moment because renewable power is so popular, this company has a huge backlog for new projects and we do think that as the world becomes more keen on renewable power, the demand for this will only continue to grow.
Black: Is the backlog an issue? Will they be able to get through that and fulfill those requests?
Winter: Well, you can say at the moment that backlog is a good thing because it shows that there is a huge amount of demand for what they do. So, at any point in the economic cycle you would hope to see some degree of backlog because it does just represent that there is a good degree of demand there.
Black: Okay. Onto stock number three.
Winter: So, the final stock is a company called Nvidia and this makes the type of computer chips that are particularly needed for video gaming and also for big data centers. And so, on the video gaming side, this is something that has really accelerated in popularity during lockdown, and we do expect that to continue, especially as things like E-sports start to become more popular. And then, on the data center side, we expect that Nvidia's products that can help to accelerate machine learning will start to become more in demand as artificial intelligence becomes more mainstream. And then, finally for Nvidia, they're starting to get involved in autonomous vehicles, and that's something that we think has a huge opportunity for growth in the future.
Black: So, I was going to ask there with computer chips, I always think of what if the next company comes along and makes a cheaper better chip? But presumably they have some protection because they're in so many industries.
Winter: They are. And at the moment they are very much the market leader and they're very much ahead of a lot of their competitors in terms of these particular types of chips. And in fact, yesterday it was announced they've just been commissioned to build the U.K.'s largest supercomputer that will be based in Cambridge. So, for the time being, it does look as if they have a lot to be getting on with to keep them busy.
Black: Okay, Rachel, thank you so much for your time. For Morningstar, I'm Holly Black.
