With the UK voting to quit the EU, the outlook for supermarkets such as Tesco (LSE: TSCO) has become more uncertain. That’s because the company’s strategy is centred on disposing of international operations to become increasingly UK-focused. And with diversity being reduced even further via asset disposals in non-grocery areas, such as Giraffe and Dobbies, many investors may feel that Tesco is a stock to be avoided in a post-Brexit world.
However, the reality is that Tesco is dirt cheap. It trades on a price-to-earnings growth (PEG) ratio of just 0.4. This indicates that it offers not only 20%-plus upside, but also that it has a wide margin of safety. So if its financial performance does come under pressure then its shares could still perform relatively well.
Furthermore, Tesco is in a very different position to where it was in the last recession. Today, it’s much more focused on selling a narrower range of goods at higher volumes, while it has also improved the efficiency of its supply chain. Tesco has also invested heavily in improving customer service and is therefore better placed to react to a deteriorating consumer outlook than was the case during the credit crunch. As such, now could be a good time to buy it.
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Bucking the trend?
Also offering 20%-plus upside is Standard Chartered (LSE: STAN). The Asia-focused bank is unlikely to be hurt by Brexit due to its geographic exposure and this means that it could act as a useful hedge against UK-focused stocks.
However, there’s more to Standard Chartered than a ballast against Brexit fears. It’s in the midst of a turnaround that’s seeing its management structure streamlined, its compliance function improved and its lucrative position within emerging markets used to successfully grow earnings in the coming years.
For example, Standard Chartered is expected to return to profitability in the current year and then increase its pre-tax profit from £775m to £1.9bn next year. This rate of growth would be staggering and could be enough to cause investor sentiment to rapidly improve and push Standard Chartered’s share price significantly higher.
Certainly, it’s well below the £6.8bn pre-tax profit recorded in 2012, but it indicates that at a time when many global banks are struggling to post high levels of growth, Standard Chartered may be able to buck the trend.
Sound business model
Gains of 20% are also on the cards for food services company Compass Group (LSE: CPG). It continues to offer investors a very consistent and reliable top- and bottom-line growth profile, with Compass’s sales having increased at an annualised rate of over 4% during the last five years. And with earnings up by 8.9% per year during the same period, Compass seems to have a sound business model that can perform well in almost any economic environment.
In a post-Brexit world, this robust performance is likely to appeal to investors and Compass’s shares may become increasingly in-demand. While a price-to-earnings (P/E) ratio of 24 indicates that its shares may be overvalued, when this is combined with its growth rates over the next two years it equates to a PEG ratio of 1.8. Given its sound financial standing, resilient business model and defensive nature, that seems to be a very attractive price to pay.
