3 Areas to Invest in the US

VIDEO: Julian Cook, portfolio manager at T. Rowe Price, considers the case for investing in US health insurance stocks, tech giants, and bargain retailers

Holly Black 4 June, 2020 | 12:43PM
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Holly Black: Welcome to Morningstar's "3 Stock Picks." I'm Holly Black. With me is Julian Cook. He is a portfolio specialist on the T. Rowe Price US Blue Chip Equity Fund. Hello.

Julian Cook: Hello, Holly.

Black: So, you are going to tell us about three areas of the portfolio that you are particularly positive on at the moment. Where would you like to start?

Cook: Yeah. So, we think given the current environment, we think a very good place for investors to be exposed to is the US health insurance industry. We own almost every health insurance company in the US The reason being, so far year-to-date, all of the elective surgeries in the US that were planned to have taken place, have not taken place as all the hospital facilities are all being concentrated on sort of respiratory coronavirus type of problems. Now, we don't think that all of those elective surgeries come back, around 50% of them do not come back. So, the health insurance companies have underwritten their business assuming a certain level of costs and the costs of these elective surgeries not happening is actually going to be a very good provider of profits for those businesses.

Black: Is that not a bit speculate to accumulate because then people could come back next year and their problems have got even worse?

Cook: Yeah. So, in our work we do a lot of work trying to understand what exactly is the nature of these operations. These elective procedures are exactly that, they are elective. They are not prescribed. These are kinds of things you can get done, not things you necessarily have to get done. And so, our work suggests that once those get delayed, then not all of them come back to the operating table in the future period of time. And the costs related to those elective surgeries relative to the costs related to the coronavirus type treatments, the costs are far lower for corona-type treatments versus elective procedures.

Black: Okay. And what's the second area that you like?

Cook: So, when we think about companies that we like, there are certain companies we like sort of short term and long term. There are companies we think maybe affected short term but still good bets long term. The next two companies, Facebook and Alphabet probably fall into that second bucket. Short term, they are exposed to small and medium businesses which is at the sharp end of the decrease in activity we've seen so far this year and also Alphabet being exposed to the travel industry, which again, when you've seen travel go down by 95%, that means that that customer base has been pretty poor for Alphabet year-to-date. But as we look forward, we think as you get through this period of time, these two businesses are going to be in a far better relative competitive position on the exit of this problem and we are wanting to sort of step through that volatility to own them through into long term.

Black: Presumably as well these sorts of tech stocks are beneficiaries of us all working or learning from home at the moment as well.

Cook: Yeah. And I think there are certain secular trends that these companies are exposed to that we've recognised and that's why we're invested. And if anything that this period of time has taught us that some of these trends which are really well established are getting accelerated to a greater degree given I guess the dislocations that we're seeing in terms of normal everyday life and social interactions.

Black: Okay. And what's our final area of investment?

Cook: So, as we think about demographics and income levels in the US, we think there's going to be some pain. As we said earlier, we think there's a recession coming. So, we want to be exposed to some parts in consumer discretionary that will actually benefit from having exposure to lower income groups. A company we really like in that space is Dollar General. It has an average basket size of $7. So, it's not going to be impacted by the advent of online and ecommerce. You can't send a box, you know, post for $7. It's price competitive with Walmart and so, there's not a reason to not to shop at Dollar General relative to Walmart. And we think there's a store expansion story here which is still unfolding to the benefit of those that understand that and can invest in the company. So, we think that the prospects for Dollar General look really, really good here.

Black: The physical stores are not still affected by social distancing measures or the fact that a lot of people might be worried about going into stores after this?

Cook: Yeah, I think that's going to be the same for every single retailer and I think that once you have that level playing field, and accept that everybody has to adhere to the new ways of behaving in retail, then relatively this company – it still has those really positive attributes relative to everybody else out there having to adhere to the same rules.

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


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Holly Black  is Senior Editor, Morningstar.co.uk