Three stock picks we're excited about in our Strategic Equity Fund and why

Alena Isakova, Lead manager of the W1M Strategic Equity Fund, one of the building blocks of our Managed Portfolio Service, speaks through three stock ideas we are particularly excited about at the moment.

Toyota is our favoured global auto name. It has leading market share globally and is investing heavily into electric vehicles and battery technology to capture the future opportunity from the green energy transition, while offering customers the choice during the transitional period as to which technology they desire. In recent quarters, Toyota has delivered improving earnings power and has continued to see robust demand in key geographies (including the US) despite rising interest rates, which we believe will help sustain free cashflow (FCF) growth in the medium term. We feel Toyota’s opportunity to compound FCF and earnings growth with greater operational efficiencies and technological innovation is undervalued by the market.

Canadian Pacific (CP) has a network in the shape of a ‘T’, connecting the Canadian Atlantic and Pacific coasts, the US, as well as Mexico in the south through the merger with Kansas City Southern six months ago. Revenue is driven by economic activity as well as industry shifts from truck to rail due to cost and emissions improvements. Synergies from the merger are exceeding expectations, and CP has heightened focus on improving asset utilisation, lowering costs and freeing up capacity in the Mexican portfolio. This should allow them to capture additional volumes from nearshoring of manufacturing capacity to North America. Improving service performance in the North-South corridor can drive additional volume share gains compared with less efficient peers. Although the uncertain macroeconomic environment has resulted in weaker investor sentiment towards the name, CP has many defensive characteristics and operational improvement opportunities from the merger, which we feel can help them sustain FCF growth through this difficult period.

Tencent operates China’s largest social media platform and gaming platform and second-largest cloud platform. Despite its scale advantage over many other players in the market, Tencent is still establishing itself in many verticals such as advertising, fintech and cloud solutions, which creates a growth opportunity domestically. It also has a sizeable investment portfolio, including stakes in companies such as Ubisoft and Krafton. Despite significant headwinds in the Chinese market, Tencent have significantly improved its profitability in all three major verticals through cost optimisation, product mix and economies of scale.