The Brexit Vote Presents Opportunities Either Way

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Includes: BNS, BP, CLDT, DHT, EPD, EXR, F, HCN, KEP, KNOP, LTC, OHI, PEB, QCOM, RAD, RDS.B, RY, SBRA, STAG, TD, VTR
by: Dirk Leach

Summary

With recent polls showing Brexit might really hapen, the markets have shifted to risk-off and equities are off hard.

Many sectors have sold off over the last three days, particularly financials and energy.

Regardless of whether Britain exits the EU or stays, long-term investors should benefit from the sell-off opportunity.

Introduction

For those who have not been watching the international news lately, Britain has a vote coming up on June 23 to decide whether they will stay in the European Union (EU) or exit the EU. This has become commonly referred to as "Brexit". Up until a couple of weeks ago, the campaign for Britain to remain a member of the EU was up by a few polling points. Last week, a new poll indicated that the "leave" campaign had gained ground and was now up by 10 points over the "remain" campaign. This is a pretty big deal on several fronts. No country has ever left the EU and the provisions for such an event were only drafted in 2009, so it is not exactly clear how the exit process will actually work. If Britain leaves the EU, how will it be treated with respect to trade with remaining EU member countries? How will banking transactions between the EU and Britain be handled -- under EU policies or new, yet to be determined international policies? How will cross-border travel be treated between Britain and other EU member countries' citizens?

Articles written about the potential impacts of a Brexit decision are plentiful and "all over the map" on the potential impact. Global stock and bond investors definitely took notice of the new polling results and the general consensus is clearly not positive for global markets. Over the last three days, investors have reacted by selling off equities and buying into safe fixed income assets driving the prices of bonds higher and yields lower. Some investors will view this as a time to hunker down and ride out the Brexit storm. However, I believe there will be opportunities presented for investors in both short-term trades and long-term investments regardless of whether Brexit is voted up or voted down. This article explores some of the possible opportunities from the long-term investment perspective.

Consequences of Brexit

As investors, we'd really like to understand what the consequences will be if Britain votes to leave the EU. Unfortunately, we really can't know the future; all we can do is lay out the different possible futures and choose what we believe to be the most likely as our basis for investing decisions. So, what are the possible futures?

There are certainly other possible futures if Britain chooses to exit the EU but I believe those listed above are at least adequate for this article discussion.

If the Brexit vote results in Britain staying in the EU, I believe the markets will stage a fairly quick recovery. Little has changed in the global economy during the last couple of weeks other than a bit of additional economic stimulus is being injected into the EU economy. I also believe the instability and volatility in global markets in the next 9 days will keep the lid on any interest-rate action by the U.S. Federal Reserve. So, I believe that market sentiment will return to "pre-Brexit" levels if the Brexit vote is to stay in the EU.

I mentioned above that recent articles published on the possibility of Brexit were all over the map. A Google search on "Brexit Impact" will provide a full range of opinion and commentary on the pros and cons that would result from Britain exiting the EU.

The position that Britain's economy would crash leading to a global recession following a vote to leave the EU I believe to be "scare mongering" by the supporters of Britain remaining a member of the EU. As it stands today, Britain is the world's fifth largest economy and the EU's second largest based on gross domestic product. Britain's economic outlook for 2016 includes 2.2% growth of GDP, the second highest rate of all EU member countries. If the vote to leave the EU succeeds, Britain and the EU have 2 years to negotiate Britain's withdrawal and new terms of trade and commerce. While some pundits have characterized a vote in favor of Brexit as jumping from an airplane with no parachute, I just don't see the crash landing happening. With the second strongest economy and second largest economy in the EU, I can't imagine a driver for Britain's economy to crash following a vote in favor of exiting the EU.

At the opposite end of the range of pros and cons is the idea that Britain's economy will soar after shedding the EU shackles and Parliament regaining control of Britain's immigration policy. I don't see this happening either for the same lack of any driver to push Britain's economy into high gear. If anything, the exit from the EU will take time to work out and there will be some stumbling in trade, commerce, and financial transactions. I believe the most likely outcome of a vote to leave the EU will result in Britain's economy slowing a bit but continuing to grow slowly. At worst, I could see a mild recession in the British economy, particularly if the EU wants to ensure that there is some measurable penalty for opting out of the EU. My assessment and thinking may ultimately prove false but this is how I see a Brexit unfolding.

So, in the time between now and the Brexit vote on the 23rd, I'm going to make my investment decisions on a future outcome of either nothing will change (no Brexit) or Britain will leave the EU with little impact on its economy and little impact on the EU economy. Given this line of thinking, there should be very little to no second order impact on the U.S. economy regardless of what the British decide to do.

Potential Investment Opportunities Between Now and Brexit

Today, I ran through my existing portfolio and my watch list portfolio to develop a short list of potential investment opportunities. I believe it is prudent to have a list of potential stocks for investment if and when the opportunity presents itself. I was a bit lax in being ready as I was not expecting Brexit to have this apparent level of impact on U.S. and world financial markets. The chart below provides the list of stocks and one MLP that I am looking to either add to my existing holdings or initiate a position in if the valuations drop enough between now and the Brexit vote.

Source: Author

The column titled "Risk" is my assessment of inherent risk of an equity investment in the company. Since everyone's risk tolerance is different you will have to evaluate whether the risk fits within your personal tolerance level. The "Ranking" column is my assessment of the stock's performance potential based on past earnings, cash flow and dividend growth rates.

For those stock symbols highlighted in blue, I have recently written articles published either on the Seeking Alpha or the Sure Dividend sites. The links in the table don't work as it is just a JPEG file (picture) snipped from an EXCEL spreadsheet. I've listed the stocks below with links to the articles for those readers wanting additional detail on the investment thesis for these companies.

Bank of Nova Scotia (NYSE: BNS) BNS Article Link

British Petroleum (NYSE: BP)

Chatham Lodging Trust (NYSE: CLDT) CLDT Article Link

DHT Holdings (NYSE: DHT)

Extra Space (NYSE: EXR)

Ford (NYSE: F)

Korea Electric Power (NYSE: KEP)

KNOT Offshore Partners (NYSE: KNOP)

LTC Properties (NYSE: LTC) LTC Article Link

Pebblebrook Hotel Trust (NYSE: PEB)

QUAL COMM Inc (NYSE: QCOM)

RiteAid (NYSE: RAD)

Royal Dutch Shell (NYSE: RDS.B)

Royal Canadian Bank (NYSE: RY) RY Article Link

Sabra Healthcare REIT (NASDAQ: SBRA) SBRA Article Link

Toronto-Dominion Bank (NYSE: TD) TD Article To Be Published June 16

There other good stocks I hold in my portfolio that I did not list in the chart above simply because it is my buy list and I have a full (or over-full position) in those other companies. Examples of stocks I would be looking to initiate positions in if I didn't already have a full position are Ventas (NYSE: VTR), Omega Healthcare Investors (NYSE: OHI), Welltower (NYSE: HCN), Enterprise Product Partners (NYSE: EPD), STAG Industrial (NYSE: STAG).

For those of you that maintain watch lists or buy lists, I urge you to share those in the comments section below so that others can potentially benefit from the research you have done.

Disclaimer: This article is intended to provide my opinion to interested readers and to serve as a vehicle to generate informed discussion in the comment posting. I have no knowledge of individual investor circumstances, goals, portfolio concentration or diversification. Readers are strongly encouraged to complete their own due diligence on any stock, bond, fund or other investment mentioned in this article before investing.

Disclosure: I am/we are long STAG, EPD, OHI, VTR, HCN, RY, TD, SBRA, CLDT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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