Standard Life's Morris Likes Rockwell Collins, Schwab (Audio)

of one percent. Stocks heading toward the biggest drop in three weeks, Apple leading an afternoon sell off in technology shares, overshadowing all of those corporate deals, and strong results from Facebook. Facebook up now by seven and a half percent to one seventeen o six. So here's where we stand ahead of the close. The Dow down one ninety five points, a drop of one point one percent, and as DAC is down forty eight points, a drop of one percent.

Ten You're up seven thirty seconds. Deal there one point eight two percent, Gold up twenty twenty ounce to twelve seventy a gain of one point six percent, and Rude of eight tenths of one percent. Sixty nine on West Texas in the media cruiting. I'm Charlie Pelton. That's a Bloomberg business flash. You're listening to Taking Stock with Pim Box and Kathleen Hayes on Bloomberg Radio. What to do with your money in an investment environment where rates are

low and equities seem to be range bound. Let's find out from Jeff Morris. He is the head of US Equities for Standard Life Investments. They are based in Boston, home to Bloomberg twelve hundred am, and he joins us in the studio. Jeff, thanks very much for being with us. Good afternoon. Alright, so just give us the top down look right now about the investment world. Right. I can't

get much by buying government bonds. Stocks can either make you're nervous or at least range bound for the time being. And commodities, well, we've all known what happens to the price of oil when we're not looking. So what do you do? Well, I'm focused on the on the equity market, and I have to say that given where the valuations are for for US equities, I wouldn't recommend, you know, broad exposure. I think it's important for investors to look

at a selective investment ideas. You know, for the longest time, the beta trade worked for for for investors and tell people what the beta sorry, the beta trade is just playing the rising tide as as stops as stocks move up from the market goes up, so you can buy

anything the market goes up. When you think about how we came out of the financial crisis, there was ample despair, you know, valuations were lower, and now the market is has moved up, as escalated for some time and now seems to be just chopping sideways trying to digest this environment of slow growth and relatively high valuations. So it's really a time I think that someone has to be more focused on how they think about the market. So

what is your methodology to do that? Then we're about halfway through earning season stablesnar stocks that are noted that we're about just past the halfway marsfp uh what what how do you then decide? First you start with an industry, how do you just choose an industry? And how how do you choose your individual companies? Well, at Standard Life Investments, we use a focus on change investment philosophy, so we're looking for at times when when there's change occurring with

companies or industries. We feel like during those transitions then the market doesn't really price in what's what's happening, and that's opportunities to buy you know, an undervalued security. So we really haven't understand you know, where there is where there is change occurring. Uh. The example of that right now, well and right now in technology, there's there's a there's a lot that's that's going on. We have old technology

and new technology. You know. One of the companies I know is an opportune time to talk about it that Facebook is one that we've held substantial positioning doing well today. We really feel like there's a lot of a lot of transition that we're going to see as as media buying goes from you know, older sources to to more more more digital source of of advertising. So that's that's an example where changes occurring. There's also a change occurring in in in older companies too, and and and more

established companies. I was thinking, for example, change in the aerospace industribute because you have more efficient jetliners. Wonder if you could speak to the issue of aerospace and defense. So for commercial aerospace, we've been through a long up cycle and we've seen the orders that Boeing has has received a you know, an order from from China, Eastern today,

but there's been a long up cycle. In fact, the market's really trying to digest Bowing right now and understand if maybe that order cycle is starting to exhaust itself somewhat. Both Boeing and Airbus got orders for about, you know, a thousand plus jets last year. So far this year it's maybe a hundred and fifty two hundreds, So it really feels like that order pipeline is starting to to

to soften. So that's one thing where you have to understand now, you know, the focus on change philosophy you're looking is are we seeing a change here in the commercial aerospace cycling? Is it's starting to soften? On on defense, you know, there's the demand, is the demand is increasing overseas for for demens defense assets is uh, you can just look at the headlines and understand where that comes from.

But then also the domestic defense budget is starting to inflect higher and finally we're starting to see some growth in in that domestic spending, which is benefiting many of the large defense primes, some which we've we've invested in.

Is an industry like defense, one that is by necessity where you you're watching the elections, not so much like sentiment and all that, but you know, at some point do you did your team have to assess, boil boy, if Trump's the president or Hillary Clinton and whoerever it is. And of course the Congress is so important here too,

right if Republicans control the House, etcetera. That how I would think that's something where you really have to focus very closely on policy because spending driving defense and driving these companies is the biggest thing. Clearly, the defense budget is something to keep an eye on. You know, the the analysis over over many decades and many different political parties and in the White House and in Congress indicates it's it's and there's not a tight correlation between which

parties in power. It's really the threat environment that drives defense spending. And and that's what we're we're looking at. We're thinking about how, you know, what's what's the evolution A powerful change that's going on in the defense industry is to try to create a more technologically advanced soldier, you know, with more modern equipment. And and that spending is really accruding to those that are providing the best in the way of defense assets. So there's there's sort

of a technological change. But then also you know, unfortunately the threat environment is right now that that that that spending needs to needs to increase. I was just going to bring up the topic of you get these big contracts and then they have a life seemingly of their own.

For example, the contract for the F thirty five Joint strike Fighter right Lockheed Martin, because I was noting that the Pentagon's top weapons tester was explaining to Congress earlier this week that the F thirty five remains immature and provides limited combat capability, and yet they just ordered a leven more aircraft. So is that that kind of company? What What do you want to hear from a defense contractor that makes you confident to want to be a shareholder.

What you want to hear is is a few things. First of all, that the new programs are progressing as anticipated. That the joint strike fighter has been in the news for for years in terms of having a variety of of technical issues here and there, but it's but it's a solid program. In fact, you know, the capability that comes from a fifth generation fighter is is just crucial um in the world that we live in. I think that one has to realize the complexity of of of

this program. This is one of the most sophisticated pieces of technology that people have ever really created. So that's um, it's understandable. There's going to be parts of it that the occasional be glitches from time to time, but it's it's it's moved along. You know, they're getting to the point where they're seeing larger and larger contracts for it, and it's and there's also you know, relatively strong international

demand as well as well too. So one of the things you want to look for the defense attractors are the solid are the major programs? Are they solid? And then also what do they do with the capital? And that's one thing that Lockheed has done an exceptional job with is returning capital to shareholders in the form of share repurchases or elevated dividends. And this is something that investors have really appreciated over over a number of years. How do the big players in aerospace and defense stack

up for you? You just mentioned Lockey, but Boeing, raytheon General Dynamics, etcetera. So we've been we've been selective amongst the aerospace and defense company. So we we we don't own any Bowing right now. We feel like it's a fantastic company with a large backlog, but feel like the shares are are are fully valued. We like companies. You know, Raytheon is a company that reported today and and there's a little bit of concerned about the margins, but they're

very well placed to participate in international growth. So we like that that particular stock. We also, you know, Rockwell Collins is one that's that's attractive as well too. They're a components supplier both on the commercial aerospace on on the defense side, so we're able to find our um you know, find our find our spots there and and there's you know, there's opportunity when when you're looking for

changes occurring in industries and companies. You know, Rockwell Collins is one where they're they're they're participating in some of these new narrow bodies, like like Boeing's new seven three seven UM that's that's going to be a powerful driver for their for their fundamentals going forward. Can I get your thoughts on the finance and banking industry for example, maybe not huge banks, but you know First Republic as well as maybe Charles Schwab and then a big bank

City Group. So you know, with First Republic, this is one that we UH that that we really like. They have an opportunity to expand their wealth management business. It's it's a geographic expansion story as they build out from their heritage in San Francisco and into other other markets in the northeast. UH. They're doing a great job of acquiring more my financial advisors and more wealth management assets, and we think that's something that they can they have

room to run. Many of the larger banks, as you mentioned City really have a difficult time growing at you know, growing at rates that are quite frankly any faster than the overall economy. So a smaller bank has that has that opportunity to be able to grow. Also, the regulatory burden is IS is much less on those on those smaller banks. Charles Schwab is is also UH, you know,

a stock with a very attractive um. It's attractive in the in the sense that they're able to gather gather assets and and they've been able to we think about innovation that's occurring. It's been one of the most innovative companies and in financial services. With UH, you know the innovation of of discount brokerage and the r A business and so forth. So it's it's it's one that we like. They're also very well positioned to benefit from when interest rates,

when short term rates ever start to increase. Who knows when that will be, but at some point we'll start to see rates go up, and and Charles schwab By their uh By, their balance sheet is is positioned well to benefit from that. Jeff Morris, thank you so much for joining us today right here in our bloomberhou stood in the New York City. Thank you very much, glad to be here. He is head of US Equities at Standard Life in Investments. He is interested in the defense

and aerospace industry, looks for change driven companies. This is taking stock on Bloombergradio