British Stocks After Brexit

As the day goes on, I hope to publish some more posts specifically in response to the day’s trading events triggered by the British vote in favor of Brexit.

But I’d like to offer you two thoughts before you participate in any activity related to a British stock selloff:

First of all, the British stocks that fell over 20% immediately upon the Brexit news are unusually low-quality names for large caps. Things like Barclays bank? Yes, the fall from $11 to $8 is interesting, but the bank’s internal controls and stability of deposit base are unimpressive. Remember this: Barclays also traded at $8 in 1996.

As in, if you’ve been a buy-and-holder for that time period, you would have only compounded wealth at a 3.5% over the full course of multiple business cycles. This is a company that is frequently cheap for a reason. You’d be sitting on an 85% loss if you purchased Barclays in 2007, and you’d be sitting on a 35% loss if you purchased it in June 2009. Think about that–how many companies that are solvent today would have lost you money if you purchased them during the financial crisis? If you’re using Barclays to make a trade, I have no opinion–it goes up and down a lot. But if you’re contemplating a long-term investment and thinking you’re getting a value price, be careful.

And don’t get me started on Lloyds Banking Group, which is even worse.

And second of all, don’t fall into the trap of thinking that a 5%, 10%, or 15% decline is necessarily indicative of cheapness. When stocks get volatile, we tend to interpret information differently than if the price arrives on a semi-straight line.

Take Unilever for example, which is down almost 8% in overnight trading from the high $47 range to the low $43 range. Unilever traded at $43 last week, $44 in May, $45 in April, $44 in March, $43 in February, and hit a recent low of $40 in January. If you didn’t like Unilever during any of those other price points, ask yourself, why do you like it now at the same price? I’m not stating a positive or negative opinion on Unilever here, but I think you’ll find that many British stocks “going on sale” right now are basically trading at other price points we’ve seen in the very recent past. Don’t let the fast-talking people in the background affect your rational analysis of whether a deal exists.

That said, a business can revisit recent prices and still be an excellent deal. If Diageo breaks below $100 today, a whole lot of wealth will be created between a purchase this morning and the amount of compounding that will take place through the 2030s. Beer stocks give great compounding returns at low risk, and the trick is to get the price right. Getting ownership in the Guinness, Jose Cuervo, Smirnoff, Johnnie Walker, and Captain Morgan brands at 17x earnings and a dividend yield over 3.3% does sound like a pretty dang good formula for wealth creation.

I’ll post some more thoughts on British stocks in the aftermath of Brexit later this evening.

Originally posted 2016-06-24 06:10:08.

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