The Brexit Has Put These Stocks On Sale

Nick Lanyi's picture

Wednesday, June 29, 2016 - 12:30pm

by Nick Lanyi

The financial world's reaction to the UK vote to leave the European Union was dramatic and understandable: a huge selloff in the British pound, big drops in most major stock markets and significant gains for U.S. government bonds. After all, voters in the world's fifth-largest economy decided to remove it from the largest free-trade zone in the world. It's hard to find an economist who thinks Brexit isn't a huge mistake.

The financial world's reaction was exacerbated by surprise: despite polls showing a "Leave" victory was quite possible, conventional wisdom in the world's financial centers was that voters would act rationally and remain in the EU, which benefits the UK economy far more than it harms it.

U.S. stocks lost about 5% in the first two days following the vote, which makes sense given the potential impact on the global economy -- and the importance of the UK and Europe as U.S. trade partners. Stocks in the financial and manufacturing sectors were the hardest hit. Note that the fall comes after a solid period of performance for the overall market; Thursday's close for the S&P 500 was close to its high for 2016.

It's highly unlikely that Brexit -- as significant a shock to the world order as it is -- will do lasting damage to most U.S. stocks. For one thing, Brexit's consequences for the UK-EU relationship aren't entirely clear; the separation is likely to be less of a clean break than the panic sellers believe. For another, the process will take more than two years to unfold. Finally, when the dust settles, global investors are likely to prefer American assets to European or British holdings; although we're closely linked to our partners to the west, we represent diversification and relative stability -- not to mention a stronger-growing economy.

The best course of action today is to follow a tried-and-true strategy for responding to crisis selloffs that aren't fully justified by the underlying fundamentals: look for high-quality stocks that sold off mainly because they got caught in the undertow and use the selloff to pick up their shares on the cheap. Here are three that may not stay this cheap for long:

Cisco Systems (Nasdaq: CSCO), the world's largest networking company, provides the backbone of the Internet's third wave -- the Internet of Things. As billions of machines and devices around the world connect to the Internet, Cisco will benefit from rising demand for the networking systems at which is excels.

Cisco has grown from the leading maker of routers and switchers -- the "traffic cops" of the Internet -- to become a major supplier for Internet Service Providers (ISPs) and remains an innovator and big player in almost every market supplying broadband hardware and wireless systems. The company has diversified into other markets and is especially proficient at Internet security products and systems, a fast-growing market. Cisco is one of the few companies in the world that can offer top-to-bottom integrated solutions that include hardware, software and security, and it's probably the best-positioned company to consolidate the heavily fragmented network security market.

Cisco is strong financially and generates solid cash flow. The stock now trades at only 12.2 times analysts' consensus estimate for earnings per share for the company's fiscal year ending July 2017 and yields 3.75%.

Disney (NYSE: DIS), one of the world's entertainment giants, runs the Disney studio and amusement parks and also owns Pixar Studios, Marvel Entertainment, ABC and ESPN, among other media properties. While investors are legitimately concerned about declining viewership at its cable channels, especially ESPN, Disney's diversity and investments in online and mobile platforms, including Hulu, should more than compensate for declining traditional cable viewership.

Disney has a strong balance sheet and cash flow. After the post-Brexit drop, Disney shares trade at 15.4 times analysts' consensus earnings estimate for the fiscal year ending September 2017. This is a great entry point for a global entertainment leader with enviable brands.

Under Armour (NYSE: UA) is the 21st-century Nike: a sporting goods maker that has used its reputation as an innovator in performance products for top athletes to become a giant consumer brand. The company sells a wide range of apparel and shoes for a range of sports for both men and women. Sales have grown from $17,000 in 1996 to more than $4 billion today -- and the company continues to grow at a rapid rate. The company has successfully expanded its brand into athletic shoes and is aggressively working to create social media and mobile connections with its customer base to promote new products and cross-market existing products.

At recent levels, Under Armour shares trade at 45 times analysts' consensus estimate for 2017 earnings per share, giving it a P/E-to-growth-rate ratio below 2 -- an attractive entry point for this long-term winner.

Risks To Consider: Continued market turmoil in the wake of Brexit could weigh on these stocks, as could a global economic recession.
    
Action To Take: Buy Disney below $105, Cisco below $28 and Under Armour below $38. 

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Nick Lanyi does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.