According to a recent article in the Financial Times, $20bn of cash has been pulled from UK equity funds since the Brexit referendum in 2016. This persistent selling may be one of the reasons why domestic stocks have underperformed during the period.
Right now, institutional investors appear to think that there are better options elsewhere. But if a Brexit deal is settled, cash could start to flow into UK stocks again.
Today I’m going to look at two potential Brexit buys from the FTSE 250. Does either of these stocks deserve a home in my portfolio?
Still motoring ahead
The automotive sector has attracted a lot of attention ahead of Brexit. There are fears for UK car factories and worries that the new car market could be heading for a slump.
One company that is heavily exposed to this sector is auction group BCA Marketplace (LSE: BCA). This £1.8bn firm is no longer simply a collection of large sheds where auctions are held. It’s involved in buying, selling, financing, preparing and delivering more than a million cars each year.
The business seems to be working well at the moment. Sales rose by 22% to £1,429.7m during the first half of this year. Operating profit was 24% higher, at £50.6m. Shareholders will enjoy a 15% pay rise, as the interim dividend rises to 3p.
What could go wrong?
BCA clearly enjoys economies of scale over smaller rivals. The group also benefits from having a huge amount of market data at its disposal.
My concern is that from what I can see, all of its activities benefit from the same factors — strong used car sales, rising volumes and low interest rates. If the market goes into reverse, I suspect profits would fall sharply across all of the group’s activities.
There’s no sign of this happening just yet. But it may be worth noting that executive chairman Avril Palmer-Baunack sold £10.7m of shares in September, reducing her holding by about 35%.
BCA shares now trade on 18 times forecast earnings for the year ending 1 April 2019, with a 4.2% dividend yield. Although this could be a good entry level if growth can be maintained, I’d prefer a greater margin of safety. I won’t be buying at this level.
One I would buy
Consumer spending is also important in the property market, especially for companies such as kitchen supplier Howden Joinery Group (LSE: HWDN). Howden’s share price has failed to break any new ground since mid-2015, and is unchanged so far this year.
However, a trading statement earlier in November showed that revenue rose by 7.5% on a like-for-like basis between 17 June and 3 November. The company says this was due to higher sales volumes and that profit margins were in line with expectations.
I rate this highly
Howden’s locally-focused business model has made it unusually profitable. The company has generated a return on capital employed of 40% or more for at least the last six years. That means that for each £100 invested in the business, it’s generated an annual operating profit of £40. That’s very good indeed.
Earnings growth is expected to be around 7% this year and in 2019. The shares now trade on just 14 times earnings and offer a 2.6% yield. For such a profitable business, this seems cheap to me. Howdens remains on my buy list.