What are we looking for?
Post-Brexit value investments in Britain.
The screen
Two months ago (June 23), Britain voted to exit the European Union, and it appears the market may have overreacted.
The July Reuters Economic Poll (the first after Brexit) revised Britain's 2016 GDP growth forecast downward from 1.9 per cent to 1.4 per cent. Half a percentage point may not sound like a lot, but in the context of Britain's GDP, this is equivalent to roughly $13.5-billion (U.S.). The August poll was an upward revision to 1.6 per cent and many of the world's top banks (Bank of Montreal, Bank of America, Deutsche Bank, JPMorgan) are predicting even higher growth.
The FTSE 100 is composed of the 100 largest companies in Britain – huge multinational corporations that aren't as exposed to the country's economy as smaller British firms. In the days following Brexit, the FTSE 100 fell 5.5 per cent, while the FTSE Mid 250 index of smaller companies tumbled nearly 14 per cent. Now that economists are realizing they may have overreacted after the vote we may find promising, undervalued companies in this mid-250 sized range.
First, we look for British companies with a market cap between $1.1-billion and $6.5-billion (approximate range of the FTSE Mid 250).
Second, we filter for stocks that have underperformed since Brexit – all stocks that have appreciated by at least 1 per cent are excluded.
Next, in the spirit of value investing, we look for a low price-to-earnings ratio – in this case, less than 12.
Finally, to avoid indebted companies that may have trouble weathering the storm of Brexit, we filter for companies with debt no more than 10 per cent of enterprise value.
More about Thomson Reuters
Thomson Reuters delivers trusted news and intelligent information to more than one billion people in 140 countries every day. Our content, software and technology support the way professionals work in a rapidly changing, ever more complex world. Thomson Reuters Eikon is the platform used by financial and corporate clients to access top research, portfolio analytics, charting and screening for every asset class.
What did we find?
Our screen yields eight companies, and interestingly, four are home builders and three are investment companies. The world's largest and most successful institutional investors are rapidly increasing their exposure to alternative asset classes such as private equity, and two of the investment companies in this screen can provide personal investors with private equity exposure.
SVG Capital is a private equity "fund-of-funds" providing investors access to numerous limited partnership funds, and effectively a diverse portfolio of underlying companies.
For those not wanting to take exposure to the pound sterling by investing in London, OM Asset Management, trading in New York, is a compelling case. OMAM is a multiboutique asset management firm that operates through eight diverse affiliates. Last week, it completed its investment in Landmark artners – a leading global private equity firm managed by more than 700 general partners.
Investors are advised to do further research before investing in any of the securities shown here.
Hugh Smith, MBA, works in the financial and risk unit of Thomson Reuters and specializes in wealth and asset management.