They say the best time to buy stocks is when there’s blood in the street and following the Brexit vote, there’s a lot of blood flowing in certain sectors of the UK market.
For the contrarian value investor, some of these opportunities could be too hard to pass up. Indeed, some domestic-focused small-cap stocks are now trading at a mid-single-digit P/E ratio and offer dividend yields above 6%.
One such company is Lookers (LSE: LOOK). Fears about a possible UK recession following Brexit have sent shares in car retailer Lookers crashing over the past year. Year-to-date shares in the company are down by 45% as investors flee the stock.
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However, City analysts don’t hold the same downbeat view as investors. The City is estimating earnings per share growth of 6% for 2016 and 4% for 2017 and based on earnings estimates the company’s shares are trading at a forward P/E of 6.3 an extremely attractive valuation. The shares also support a dividend yield of 3.5%.
But are investors right to be turning their back on Lookers? Well, while it’s true the company will suffer if the UK plunges into recession, it’s unlikely income will fall by 50% as the market is suggesting. A 50% decline in earnings would see Lookers earn around 8p per share next year. The last time the company reported such a figure was 2012, and since then the business has doubled in size (in both assets and revenue). It seems unlikely earnings will decline to this level again any time soon.
Property problems
LSL Property Services (LSE: LSL) is another domestic-focused business investors have dumped since Brexit. Since June 10, shares in the company have lost 44% of their value taking the valuation down to a measly 8.2 times forward earnings. City analysts expect LSL’s earnings per share to slide by 23% this year, but this decline is already baked into the company’s valuation. Next year the City has pencilled-in earnings growth of 11% giving a P/E multiple of 7.7 for 2017.
It would appear that the sell-off in LSL’s shares is fuelled by the market’s concern about the state of the UK property market. Owning property stocks has become something of a taboo since Brexit, and the whole sector is still below its pre-Brexit highs.
Around 40% of LSL’s 2015 revenue came from selling properties, 20% was from the sale of financial products — mainly mortgages — another 20% came from lettings management and the remainder of the group’s income was from property surveying services. So it’s clear the group is exposed to UK property and any post-Brexit slowdown will hurt the company. However, just like Lookers, LSL has grown substantially over the past few years and has positioned itself to weather any property market downturn. The company’s dividend payout is covered 2.5 times by earnings per share and LSL’s diversification across several lines of business should help the firm pull through any slowdown.
