American Stocks After Brexit

Perhaps it is because I have far more American than British stocks as a reference point when studying the stock market, but I was a little surprised to see that American stocks seemed to offer a good deal in the aftermath of Brexit than many British stocks themselves.

The only British stocks that came down substantially in the aftermath of Brexit were the financial institutions, and they have such difficult to determine intrinsic values that I am not sure any firm conclusions can be drawn regarding their fair value. They have wide latitude to engage in “the rehypothecation of collateral” which involves pledging the assets of customers as collateral for their own activities. At Barclays and Lloyds, you see the same assets getting rehypothecated two, three, four times over, and is a big reason why Barclays fell from $62 to $3 during the financial crisis. Because the financial sector is such a pride of London, it faces less restrictions which can be good during boom times but is disastrous as soon as you enter a recession that goes a few notches deeper than what is foreseeable. Citigroup can’t brag about its general practices compared to too many other institutions, but it can compared to Barclays.

Meanwhile, you have companies with proven track records selling at fair prices in the United States. Do you see Tiffany at $60 per share right now? There is no way that this investment fails to generate 8% returns over the long haul, and there is a good chance that the long-term returns will be in the 11% to 12% range at this price point. It has a record of 14% annual returns, is selling at a P/E level below its historical norm, has a conservative balance sheet, and doesn’t engage in gimmicks to smooth out earnings so the result is that the earnings reported are a bit volatile but of extremely high quality.

Schwab is now trading at $25 per share, which is one of the more underrated stock selections in the market. People probably have no idea of this fact, but it has returned almost 20% annually since 1989. Unlike its peers in the asset management industry, it earns a lot more profit based on activity, and therefore can report strong earnings even during periods when the stock market declines and assets under management decreases. This is about the closest to the 20x earnings threshold it has seen outside of actual crisis; it’s a baby that got thrown out with the bathwater in the aftermath of Brexit.

And my favorite? Nike fell to $49 shortly after earnings yesterday, as some segments reported high single digit growth for the quarter compared to the double-digit figures that the investor community is accustomed to hearing about. Assuming that Nike earns $2.20 this year, investors got a chance to buy the stock at 22x earnings briefly. That’s sort of an advantage of having mischief and panic in the headlines; there is a chronic overreaction to short-term news that gives the long-term investor a window to strike. Nike is now back up to $55 per share, which I still conclude is a pretty fair deal, though it entered the fringes of “good deal” territory briefly last night.

I don’t think you can claim yet that Brexit has created good deals in the market. The British banks, the most to fall, were not conservatively managed to begin with, and do stand to suffer an actual impairment if it loses its status as the hub of financial activity in the Euro zone.

Most other fluctuations, be they British stocks are otherwise, don’t really have an intrinsic value change as the result of Britain’s decision to exit the EU. The problem? The prices haven’t really changed as a result of the Brexit vote. The things that were a good deal last week are a good deal this week, and it’s hard to find businesses that make you say “because of the Brexit overreaction, Stock X is now a good deal.” That said, the air of headline panic may have added some zip to Nike’s fluctuation last night, as well as offering a slightly better discount in the shares of Schwab. Tiffany stock was cheap last week, and remains so this week. I think you would need to see a couple more countries leave the EU, coupled with punitive trade terms thereafter, before you would see a sustained market panic that would unfairly punish some unaffected businesses and provide a really nice entry point.