Yesterday’s High Court ruling that Brexit must be backed by a Parliamentary vote did nothing to calm some investors’ fears about the UK leaving the EU. But this isn’t a universal view.
A good number of investors and businesses believe that our economy will remain stable. They think that current market conditions are providing good buying opportunities and Brexit isn’t a major concern.
There’s no way of knowing which view is correct. But UK-focused businesses have been generally weak since the referendum. Today, I’m going to look at two companies with the potential to deliver big gains if market sentiment swings back towards domestic stocks.
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This five-bagger has fallen hard
Shares of Dart Group (LSE: DTG) have fallen by 43% since April. Remarkably, they’re still worth 490% more than they were five years ago. That’s a sign of how far Dart — which owns the Jet2.com holiday and airline business — has come since 2011.
Dart’s revenues have tripled over the last five years, while the group’s operating profit has quadrupled. The only problem is that earnings per share are expected to fall by about 25% this year. This has led to the shares falling to a 2016/17 forecast P/E of just 8.7.
Last year was a bumper year for Dart, but this year was always going to be more tame. Dart is investing heavily in its travel businesses. The group is opening new bases at Birmingham and Stansted airport, and has bought 30 new Boeing 737 aircraft.
If the economy crashes, then these investments may prove to be badly timed. But there’s no sign of this yet. Indeed, the outlook for sales is quite positive. Brokers covering Dart expect revenue to rise by 13% during 2016/17, and by 15% in 2017/18.
The outlook for earnings is less certain. A minor profit warning in September took the shine off previous earnings upgrades. Personally, I’d wait until Dart’s interim results are released on 17 November before making any trading decisions.
Is this 7.7% yield a buy?
Like other housebuilders, Barratt Developments (LSE: BDEV) was hit hard by the Brexit sell-off. But trading has remained stable, a trend that’s been seen across the property sector. In Barratt’s latest market update, the company said that since July, both reservation rates and forward sales have been higher than during the same period last year.
If this situation continues, then Barratt could start to look cheap. The shares currently trade on just 1.5 times their tangible book value, and with a 2016/17 forecast P/E of 9. These figures seem pretty reasonable, to me.
Barratt’s forecast dividend yield of 7.7% is attractive but needs some explanation. It’s made up of an ordinary dividend and a special dividend. The ordinary dividend is based on one-third of earnings. The special dividend is part of a three-year plan to return £400m of surplus cash to shareholders.
The second of these special payments is due this month, with the final payment due next year. What happens beyond that is likely to depend on the state of the housing market. While Barratt is generating a lot of surplus cash at the moment, this might not continue.
However, if the economy remains stable as we get closer to Brexit, I believe Barratt could offer decent upside from current levels.
