Brexit blues and domestic bargains: looking for neglected UK stocks

Wednesday, Aug 28 2019 by
Brexit blues and domestic bargains looking for neglected UK stocks

It feels as though today’s markets bring more downside risk than upside. A gloomy note to start on, but it’s hard to argue against when you look at some of the facts. Depending on how you define it, we are thirteen years into a bull run. Most last for around eight years.

This bull run has been supported by a kind of financial alchemy that up until recently some academics did not even think was theoretically possible (coincidentally, the acronyms for these monetary policies sound like the villains in a bad sci-fi film: ZIRP, NIRP, and QE). Historically low (and even negative) interest rates have inflated financial assets. Unprecedented levels of QE (bond-buying) programmes across some of the largest global economies have also contributed to an artificially favourable environment for these financial assets.

Meanwhile, the political situation is unsteady. China and the US continue to throw tariffs at each other, like warring pupils on either side of an unruly classroom - and the rest of the class isn’t behaving much better. Germany’s growth is stalling, as is the UK’s. Around the Eurozone, upstart political parties are staking a claim and threatening to change the complexion of politics across the continent.

Add to this the small matter of Brexit. Uncertainty kills business confidence - and it seems like there’s a lot of uncertainty around at the minute. More than a decade after the last big financial crash, and at a time of fairly weak global economic growth, you might think that Britain’s exit from the European Union is perfectly poised to be the straw that breaks the camel’s back.

But being a contrarian is what a lot of successful investing is all about. With all this doom and gloom around Brexit, might battered UK domestic stocks actually be one of the most attractive contrarian plays around?

Overseas buyers certainly seem to think UK assets are good value right now if the recent spate of M&A activity is anything to go by. Asset-backed, UK-focused leisure stocks easyHotel and Greene King, for example, are both getting snapped up by overseas buyers.

Comparing the FTSE All Share IndexReport to Germany’s Xetra Classic and the US S&P 500 does appear to indicate that UK stocks are trading at something of a discount:


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Headlam Group Plc is a United Kingdom-based company, which is engaged in the marketing, supply and distribution of a range of floorcovering products. The Company's operations are focused on providing customers, principally independent floorcovering retailers and contractors, with a range of floorcovering products supported by a next day delivery service. The Company operates through 56 operating segments in the United Kingdom and five operating segments in Continental Europe. Each operating segment is a trading operation aligned to the sales, marketing, supply and distribution of floorcovering products. The Company's activities and facilities are located throughout the United Kingdom, France, Switzerland and the Netherlands. Its business in France operates from approximately two distribution centers and over 20 service centers, and the businesses in Switzerland and the Netherlands each operate from a single distribution center. more »

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ScS Group plc is engaged in the provision of upholstered furniture and flooring, trading under the brand name, ScS. The Company specializes in fabric and leather sofas, and sells a range of branded and ScS branded products sold under registered trademarks, including Endurance and SiSi Italia. The Company also offers a range of third-party brands, including La-Z-Boy, G Plan and Parker Knoll. The Company operates from approximately 100 stores nationwide along with an online sales and also has approximately 10 distribution centers across the United Kingdom. The Company has operations in retail park locations and in House of Fraser stores across the country-as far north as Aberdeen and as far south as Plymouth, offering a range of upholstered furniture and floorcoverings. The Company also runs a made-to-order sofas, furniture and flooring concession within House of Fraser. The concession operates from approximately 30 House of Fraser stores across the United Kingdom and online. more »

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Sports Direct International plc is a sporting goods retailer, and it operates a portfolio of sports, fitness, fashion and lifestyle fascias, and brands. The Company's segments include Sports Retail, Brands and Premium Lifestyle. Its Sports Retail segment includes the results of the United Kingdom and international retail network of sports stores along with related Websites. Its Brands segment includes portfolio of various brands, such as Everlast, Lonsdale and Dunlop. Its Premium Lifestyle segment includes the retail businesses, such as Cruise, Flannels and USC. In Sports Retail, it offers a range of sporting apparel, footwear and equipment through Its Fitness Division comprises over 30 gyms located across the United Kingdom. Its channels include standalone stores and multi-fascia retail spaces, concessions within department stores and online. Across its Sports Retail fascias, it has over 700 stores, and across Premium Lifestyle fascias, it has over 83 stores. more »

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15 Comments on this Article show/hide all

23jez 28th Aug 1 of 15

Good article

I think most of us would want to sucessfully follow this style Indeed I have held BP shares for over 50 years and never taken a dividend  I have crystalised someprofit when I have needed to make large purchases and they have shaped my investment strategy.  They produce something of value, they are mangaged mostly by those who understand the business not just business. The need for oil is not going to end any time soon, they have diversified within their area of expertise and shareholders have been well rewarded through both good and bad times.

I would like to make two points:

1. I have read all the top QV screens and I am shocked as to how few of the companies listed I recognised.  I now have a new research project

2. I have found/find the most difficult investing decisions are optimising buy and sell points. Over the years I was fortunate to read   III bullitin boards with technical analyis contributers who regarded Stan Weinstein as their Guru, and generously shared their expertise. His book is out of print but it is still worth reading. Obviously it is easy to confuse one's self and make mistakes if one is a trader and after fine margins.  However if one is a an investor and follow his growth staging and moving average trends advice I find I make fewer mistakes, as timing is a little less critical

I am relative new to Stockopedia so Iam suprised to find so little discussion of Technical Analysis

23 Jez

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Mike888 28th Aug 2 of 15

A good article, however, given where we are it is little surprise that consumer cyclicals are getting a bit of a beating, whether these are bargains very much depends on whether the "value" exists tangibly now, or whether the forecasts predict value in the future and that forecast becomes fact. 

A contrarian investor has a conviction which is out of kilter with the wider market consensus, the predominant characteristic of a contrarian investor is patience. As the price falls, the obvious play for a contrarian is to top up, after all, if was cheap then, it's even cheaper now.  Although superficially similar, this is not the same as a martingale approach which is simply doubling down to reduce average holding price,  a contrarian investors mindset is more about snapping up the bargain and probably already plans to top up in the future.

Does this mean that they are right to commit capital on an outcome with an unknown investment horizon, which is a punt on an outcome that the masses don't believe in? Is that lone individual better qualified to make an assertion than the entire market?

Sure, there are many luminaries that have achieved great success via a contrarian approach, these guys grab the spotlight, they are true gurus and have skills most of us will never attain. Also true that the market has a short term outlook and is somewhat twitchy and fickle. But for every guru, there are exponentially more investors that have failed due to misjudged contrarian conviction, or have the wherewithal to manage the anguish, or increased capital needs of long term commitment against a falling share price. 

Personally, and I guess this is probably obvious by now, I don't believe contrarian approaches work for the average investor, the quality value hypothesis works for some stocks over a variable timescale, but it fails for more than it succeeds at an individual stock level. 

My approach, that works for me, is to listen to the market. If you have conviction in a stock that is getting a pummelling, simply wait for signs of market confidence in it. Yes, you may lose out on some percentage points if your contrarian play was perfectly timed, but realistically is that likely to happen.

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jwebster 29th Aug 3 of 15

Good call out on Lord Lee, useful reminder from one of the greats, thanks.

If the market drops on hard Brexit, I'll buy. May coincide with a global slow down which will help make stocks even cheaper.

I plan to top-up existing stocks I already like and understand. I'm not planning on finding new small caps to buy specifically for Brexit dip buying, as the thesis is broad miss-pricing of the UK's long term prospects, so good stocks should just get cheaper. Not sure about the Stocko QV screens as a place to start looking though, my better small cap stocks are not the cheapest. Any company which shows growth does not have bargain pricing. The cheaper small caps I see are ex-growth with poor prospects, which I avoid. I worry Stocko screens present value traps.

A sector I have got my eye on is UK REITs and some builders (not the Help to Buy gang). They are heavily discounted and are a contrarian buy. Of course, the short thesis is when the asset mark-downs eventually arrive, they will be forced to sell their best assets in an illiquid market, leaving them with dross portfolios. Doomed.

Also, the consumer finance and SME lending sector has been beaten down to recession levels. Likewise, the short thesis here is simple, rising impairments will wipe out earnings and balance sheets, leading to breaching debt covenants. Doomed.

Such is contrarian investing !

I actually think the short thesis is correct, but not in every individual company's case. There are some firms in these sectors I believe will survive and have been sold down indiscriminately with the sector. That's the play here.

The alternative is to just buy indexes on market dips.

I plan all three
1. add to existing small caps I know and understand in detail, if prices drop on Brexit malaise, no need to find new stocks in this event, go with trusted
2. I have bought a couple of contrarian plays in property and finance, couldn't help myself
3. buy the index if the market really swoons

Already hold Silver as a defensive

Let's see what happens

"Everyone has a plan until they get punched in the face"
...Mike Tyson

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john652 29th Aug 4 of 15

I love that Tyson quote, and a market correction hurts like a punch in the face. Good comments jwebster and Mike.

So we have €13 trillion debt at negative interest rates, does anyone really understand that, the world central banks ready to turn on the taps, everyone seeing recession on the horizon (when the big ones hit its often a surprise to the supposed informed), and half the ftse & a lot more on mega yields. Even if a recession hits, even if Brexit is a is very messy, is Aviva at 9% , l&g at 8%, imperial brands at 9%, new river riet at 13%, etc going to have to slash dividends? Maybe, by what 50%, to me that’s still a very high yield when all debt will be at 0% by then.

So I accept capital may be hit, but for my income side of the portfolio I am a buyer at these levels, if Aviva manages 3 years at 9% , in my mind , that’s a 30% downside protection to capital offset by divi’s.

VUKE is nearly 5% yield, buying that too.

What stocks are other buying for income? Very open to ideas here.


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mortimer 29th Aug 5 of 15

the qv ranks was the reason i joined stockopedia its a golden goose

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Jack Brumby 29th Aug 6 of 15

In reply to post #508386

Hi Jez,

Re. buying and selling - you're not alone! Most of us struggle in this area. I linked to a research note a while ago here that basically concludes selling is a massive blind spot for investors. I suspect sticking to some kind of rules-based system for selling (like your moving averages) can improve performance, or at least introduce some consistency and remove some emotion from the decision-making process.

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sharmvr 29th Aug 7 of 15

In reply to post #508466

For income, I recently added to my holding in Legal & General (LON:LGEN) and initiated a position in Card Factory (LON:CARD).
I have also added to my holding in Prudential (LON:PRU) , which is on a reasonable yield at long last.

Legal & General (LON:LGEN) - Cheap with high yield - probably the most reliant on UK for investment returns especially given some of their new initiatives such as build to rent - housing shortage remains and people can't afford, at least in London area (where I am) and I also see Birmingham is going a similar way.
I think market malaise is down to:
Brexit & UK Centric strategy and yields coming down which could impact the returns on their bulk annuity business.

Card Factory (LON:CARD) - Cheap with high yield - very cash generative and decent margins due to vertical integration and that fact that when you buy cards, you end up buying some porcelain novelty junk item and trustworthy management.
Growing store estate so ideally some good deals to be had - will be looking out at how the debt moves which I think is the biggest threat to the dividend.

Prudential (LON:PRU) - In the absence of any news, I think the malaise is down to emerging market jitters and also a view that when they split the business, M&G won't command anywhere near what was hoped 6 months ago.
I hold for the backbook and emerging markets exposure with a yield above 4% and P:B well below their historic average.

In the above list, I also hold £WKB and am seriously considering Headlam (LON:HEAD) , rather than Brexit, I am more concerned about their exposure to Europe.
That said, I do hold VANGUARD FTSE DEV EUROPE EXUK UCITS ETF (LON:VERX) - not interested in adding, but I do think this can be attractive if the ECB follows Japan in buying equities directly.

In light of the general value in UK, I think using something like VANGUARD FTSE 100 UCITS ETF (LON:VUKE) is effective or even something on the FTSE All Share, which would have more diversification, a 3.5-4% yield and perhaps not be as exposed in the event of a sterling rally as the 100.

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Gromley 29th Aug 8 of 15

In reply to post #508541

At the risk of being guilty of self promotion, it is a nice coincidence that one of your QV picks (now enjoying the full house of QVM) Walker Greenbank (LON:WGB) is the subject of my little mind experiment on when to sell.

Any thoughts on selling discipline would be most welcome over there.

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BlueFrew 29th Aug 9 of 15

In reply to post #508466

I've been buying £IGG as it popped on the screen I use to filter potential investments and I like the 8% yield. As you say, even a halving of the dividend gives you a very nice 4% dividend.

The dividend is barely covered this year, but I think these are temporary issues as they've gotten to grips with the new regulations and changes in this sector. Management seem confident and whilst managements can sometimes be over optimistic, I think in this case there are grounds for optimism. I also like the fact that they should see more trading activity in volatile markets, so even if we do enter a bear market, earnings should hopefully hold up reasonably well. I consider it a much higher quality business than some of their listed competitors. It certainly doesn't have the reputation for ripping off customers that at least one listed peer does.

(I'm long £IGG and also have an account with them)

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zeibots 29th Aug 10 of 15

In reply to post #508386

Yes 23 jez, I have read Stan Weinstein`s book many times over. Mark Minervini follows his basic principles and then some. Timing opening positions and avoiding substantial losses? You cannot top Minervini if you are a true techno-fundamentalist.

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jwebster 30th Aug 11 of 15

Legal & General (LON:LGEN)

I was intrigued by LGEN given PER 6.7 a dividend yield 8% and a good history of increasing EPS.

However, when I reviewed their results presentation, I saw they have been expanding into Pension Risk Transfer. My, very rough, surface understanding of this is LGEN is taking on defined benefits pension risk for a fee. So, I worried about how they are matching assets to long term liabilities in a global lower interest rate environment.

Looking initially at their investments I saw a pocket of corporate credit, in particular 34% in BBB grade. BBB bonds are in my view quite high risk as only one notch from non-investment grade. Also, in this cycle, tons of BBB have been issued convent light, in the mad scramble for yield. If there’s a macro problem, BBB gets downgraded and bonds funds will have to dump them as forced sellers, given they don’t have the mandate to hold non-investment grade. Now, I get it, right now higher grade bonds have woeful yields and the default rate on BBB is benign so where else do they get yield from today? But…

So, at that point I didn’t dig any further. Appreciate the divi’s are mighty juicy but just buying high divs can be a value trap. LGEN could be fine, but I would have to spend a long time really digging through their investment balance sheet to be comfortable with this one.

Appreciate others’ view on this.

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psin 30th Aug 12 of 15

A reasonable principle on selling is to sell half and go from there. Providing you have made a profit, of course.
Discipline is very hard to put into practise, we humans being what we are.

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sharmvr 30th Aug 13 of 15

In reply to post #508681

Good points regarding there bond holdings, but to be fair BBB ratings have pretty low default rates and in a world where companies can re-finance for cheaper, the risk of default is limited.
That said, of course if they do get downgraded it will be a problem for them (and everyone else).

I hope they have bought these historically and hold to maturity so should ideally be sat on some mark to market gains.

Re the pension transfer, pretty much yes - they are insuring the risk of the defined benefit pension scheme. Such schemes are closed to new members and they receive the premium (fee), the assets of the pension scheme and its liabilities.
I expect (hope) that the once being bought are well funded schemes (for the company they get rid of the volatility that goes with pension accounting), because if the scheme is in deficit the premium is likely prohibitively expensive.
Also, these guys are probably better placed to hedge longevity risks compared to a corporate entity.

The market seems to share your view over mine however!

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xcity 31st Aug 14 of 15

In reply to post #508681

I don't disagree with your concern about BBB risks, but you're simply identifying a hypothetical risk in an equity you are purchasing. The important issue is the relative risks between different equities and alternative assets. If there is an event that hits BBB bonds as a class, how many equities would be unaffected?

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iwright7 31st Aug 15 of 15

An interesting podcast with Prof Cam Harvey whose pHD back in 1986 identified the likelihood of an inverted yield curve indicating a forthcoming drop in growth/recession. A US inverted yield curve was triggered in July this year and the question then is what to do about this from a portfolio perspective?

Backtesting many decades of inverted triggers, has shown that Value does particularly well in early post recession years and that recession causes investor flight to Quality. Put 2 + 2 together and we should have a High QV out-performance opportunity during recovery. No 172 Cam Harvey

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