Nobody knows exactly what Brexit will mean for the UK economy. The decision to hold a snap general election in June means that we can’t even be sure who will be negotiating our Brexit deal.
To help hedge my portfolio against the potential downside of a hard Brexit, I’ve been looking for stocks which could do well if the UK ends up making a stormy exit from the EU.
Is this stock oversold?
FTSE 250 spread-betting firm IG Group Holdings (LSE: IGG) lost 38% of its value in one day on December 6, after the Financial Conduct Authority (FCA) announced plans to tighten the regulation of this sector.
These new regulations — if passed — do seem likely to put pressure on IG’s profits. But financial trading firms like IG usually do very well in volatile markets. If Brexit does lead to a period of financial turmoil, trading profits could rise regardless of any new regulatory restrictions.
IG’s UK customer base is generally seen as being of good quality. Many of its biggest customers are expert investors who have been with the firm a long time. And it isn’t as dependent as some of its peers on a constant supply of inexperienced new customers.
The group has also made a serious effort to diversify into stockbroking and “smart portfolio” services. IG customers can now open ISA and share trading accounts and invest in ETFs.
Although third-quarter revenue fell by 3.8% during “a quiet period in global financial markets,” active client numbers rose by 13% during the same period. Active client growth for the year to date is 20%.
Broker forecasts suggest that IG will generate earnings of 45.4p per share for the year ending 31 May. Earnings are expected to fall by 10% to 41p per share in 2017/18, when the FCA changes may start to take effect.
I think there’s a good chance IG could beat expectations. With the stock trading on a forecast P/E of 12.5 and a prospective dividend yield of 6.1%, it has gone onto my watch list.
Profit from failure
My second pick, Begbies Traynor Group (LSE: BEG), makes most of its money when its customers go bust. Begbies is one of the UK’s largest insolvency practitioners.
The firm has not done as well as expected since the financial crisis. UK banks have often been willing to extend loans rather than force businesses into bankruptcy, and low interest rates have helped make repayments more affordable.
To help cope with these headwinds, it has cut costs and acquired smaller firms to increase the range of services it offers. For example, the company acquired a property auction business last year.
Although the dividend was cut in 2011, shareholders have received a flat 2.2p per share payment each year since then. At the current share price of 48p, this gives a yield of 4.6%. Adjusted earnings are expected to rise by a modest 3% to 3.3p per share this year, giving a forecast P/E of 15.
However, profits are expected to increase significantly in 2017/18. Begbies’ house broker has pencilled-in a 24% rise in earnings to 4.1p per share. In my view this steady performer could be a good stock to tuck away for protection from future uncertainty.