Brexit Buy list

As Michael Caine famously said in The Italian Job: ‘You're only supposed to blow the bloody doors off'. If UK voters were planning to register their dissatisfaction with the European Union, they've done more than that now. That of course is their prerogative and the UK is to be commended for giving them the choice – the express approval of the people has been one thing sorely lacking from the whole ‘EU project'.

So what happens now?

Well according to the Lisbon Treaty, anyone wanting out of the EU is allowed two years to negotiate its departure. The clock will start ticking when the UK serves notice of its intention to withdraw. It gives an idea of how negotiations might go, that there is already a dispute over when notice should be given (the EU wants it as soon as possible; the UK government plans to wait at least until it has a new prime minister).

Over the short term it's likely that some companies will delay investment in the UK (and possibly the EU), until the terms of Britain's exit are clearer and any new laws and regulations are enacted. However, the more that's delayed now, the more there will be to do later and we expect the UK economy to come bouncing back when the dust settles. Over the long term, then, we'd guess that there will be pluses and minuses for the UK economy, with little net impact.

There are deeper issues of sovereignty, with Scotland (which voted overwhelmingly in favour of staying in the EU) now calling for another devolution vote. The border between Northern Ireland (part of the UK) and the Republic of Ireland (which is in the EU) may also cause difficulties.

If it was just the UK, though, global markets would have little interest. Of greater concern is that the UK's decision might prompt others to have their own votes – and there's anxiety within the EU over how these might go. There were already pressures within the EU, however, and if this brings some focus to sorting out its problems – and actually doing what people want – then maybe it'll do some good.

Embracing uncertainty

What the vote has created, though, is ‘uncertainty' – which is something financial markets absolutely hate. As I wrote last Tuesday, though, in Uncertainty offers opportunity, the future is always uncertain – and there's no time when it's more uncertain than any other. It just sometimes seems that way, particularly where there are big things afoot. This is when investors should be scanning their watch lists looking for the investments that can deliver value over decades rather than a few years. In many cases, that value will hardly have changed, but the prices certainly have.

The ASX fell about 3% on Friday and – after some wild trading overseas Friday night – the futures market is anticipating a flat opening on Monday morning. There are likely to be some further wild swings, though, and we're on the hunt for bargains.

The most obvious downside to the Brexit is to companies that have sales in the UK. The pound fell by 7% against the Australian dollar on Friday so, all things being equal, revenues earned in that currency will be worth that much less to Australian investors. The uncertainty might also cause businesses to delay investment, thereby putting a brake on the UK economy – although the lower currency may boost exports and, as already noted, we'd expect an investment slowdown to be temporary.

Likely upgrades to Buy

GBST Holdings is exposed to both these effects, with around a third of revenues denominated in sterling and a number of UK platform implementations currently taking place and in the pipeline. It wouldn't be surprising to see some projects delayed. On the other hand, things have been looking up since we set our $5 Buy price, with GBST's biggest UK client, Aegon, making a couple of acquisitions which should increase volumes on its platform.

So we're happy to stick to our Buy price and, assuming the price doesn't bounce up above about $4.90, we'll be upgrading back to BUY. The risks for GBST have risen, though, and we're acknowledging this by cutting our maximum recommended weighting to 5%. Those who already own the stock are advised to pay close attention to it.

National Australia Bank has also fallen below our $25 Buy price. After a well received interim result, the price has been falling with investors expecting the good news on impairments to be short-lived. We don't doubt it, but even after adjusting for our estimated through-the-cycle impairment charge of 0.5%, the PER only rises to about 13, which isn't bad for a business earning a (through-the-cycle adjusted) return on equity of around 11%. We're happy to stick to our Buy price and, in the absence of a bounce above about $24.80, we'll be upgrading to BUY.

Banks can be highly volatile, though, and just when you think they can't go much lower (or higher) they have a habit of doing exactly that. We'd therefore stress our recommendation that you shouldn't have more than 20% of your portfolio in bank stocks, or closer to 10% for conservative investors. For those below those levels, we'd also recommend a staggered approach to building a position, with an initial investment well below our 10% maximum recommended portfolio limit for the stock – probably more like 3%.

Bear in mind also that the other banks are only just above their respective Buy prices and it wouldn't take much to make them Buys as well. So this shouldn't be seen as a big vote in favour of NAB. All the banks are there or thereabouts, but we're happy with our Buy prices and NAB is the one that gets the upgrade for now.

Virtus Health is also in line for an upgrade, in the absence of a large bounce, with Friday's close of $6.58 well below our $7 Buy price. Again, for those with holdings already we note our recommended portfolio limit of 5%.

Oil Search is another likely upgrade, if it remains at or below Friday's close of $6.43 (compared to its Buy price of $6.50). For further details, see our comments in Is it time to buy oil stocks? Pt 2 two weeks ago, where we noted that at $6.88 it was ‘within a whisker of being upgraded'.

Possible upgrades to Buy

Woodside Petroleum – another company mentioned in that review – is also closing in on an upgrade, but at $25.77 compared to our Buy price of $25 it still has a little way to go.

Platinum Asset Management has fallen below our $6 Buy price, but we still have concerns about the risks to the business of founder Kerr Neilson eventually retiring. It's also beginning to look a little out of touch, resolutely sticking to its knitting of picking stocks and putting them in funds – while the rest of the industry is moving onto passive investing, roboadvice, separately managed accounts (like our own Growth and Equity Income portfolios) and all the rest of it.

We admire it for that, but in the absence of outperformance (and the flagship International Fund is behind over five years), the chunky fees look hard to justify – particularly in a low-growth environment. With this likely to weigh on fund flows, we're reducing our Buy price to $5.50, representing a price-earnings ratio (PER) of about 15. With the price now at $5.75, though, it wouldn't take much to get there. (We'd also draw your attention to Platinum's comments on the impact of Brexit – and those of respected UK fund manager Neil Woodford while we're at it.)

Existing Buys

Of course there are a bunch of opportunities currently on our Buy list that are now looking even better value. Chief among them are probably Woolworths and Perpetual. In our reviews we've talked about $20 as a level where people might consider topping up holdings in Woolworths bought at higher levels – and at $20.56 we're nearly there. For new investors, this is beginning to look like a compelling opportunity. Further falls are still quite possible, though, so we wouldn't be going beyond a portfolio weighting of 5% or so.

Perpetual took a 5% hit on Friday due to the fall in the ASX. The All Ordinaries is still close to its average level for the 2016 financial year, though, so prospects are for earnings to grow slightly in 2017. With a PER of 15 at Friday's close of $40.68, it looks like a great opportunity.

IOOF and Computershare can't boast the same quality as Woolies and Perpetual, but they come with cheaper price tags, with both trading at 13 times forecast 2016 earnings at Friday's closing prices.

BHP Billiton and South32 are also worth a look after falls on Friday of 8% each, as is Crown Resorts, which has now given up almost half the gains made after announcing its demerger plans ten days ago.

Of course there are a further eight stocks on our Buy list – Amaysim, ASX, Fleetwood, iCar Asia, Myer, News Corp, PM Capital Global Opportunities and PMP – all of which look a little cheaper today than they did on Thursday.

The last mention goes to CYBG Group, which was hit by an 18% fall on Friday. That leaves it down 13% since we downgraded to Sell on 25 May and 9% below our Sell Price, so we're moving it back to Hold.

Note that where we're not recommending taking action (ie changing price guides or switching to Hold) we can make the change outside market hours (and we're therefore doing so with respect to Platinum and CYBG). However, where we're recommending taking action (ie buying or selling), we need to wait until the market opens to get a live price (for the purpose of accurate performance reporting). So look out for the relevant updates soon after 10am tomorrow – and happy bargain hunting!

Note: The Intelligent Investor Growth and Equity Income portfolios own shares in many of the companies mentioned. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.

Disclosure: The author owns shares in GBST, Virtus Health, Perpetual, iCar Asia, News Corp and Woolworths.