Since Brexit, Tesco (LSE: TSCO) has fallen by 6%. This may be rather less than many investors were fearing. A bigger drop was expected because Tesco is gradually selling-off its non-UK assets in order focus more on its UK grocery operations, so the potential for a UK recession, and further food price deflation, would cause its shares to come under pressure over the medium to long term. After all, Tesco performed poorly following the last recession when no-frills supermarkets became increasingly popular.
Significant upside
However, the main growth driver for Tesco is likely to be the implementation of its current strategy and its performance versus peers. Most investors expect the supermarket sector to be challenging, but Tesco can still perform well relative to its peers, and deliver capital gains for its investors if its strategy continues to work well. For example, new product lines are boosting sales, while Tesco’s cost base is being reduced by a more efficient supply chain and efficiencies being generated elsewhere.
Although its future is uncertain, Tesco appears to offer significant upside. Its price-to-earnings growth (PEG) ratio of 0.4 shows that it offers a potent combination of growth and a very reasonable price.
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Also falling since Thursday’s result has been Purplebricks (LSE: PURP). The online estate agent is down by 8% and further falls could lie ahead. That’s because the volume of transactions in the UK housing market is likely to decline as uncertainty increases and would-be buyers decide to adopt a ‘wait and see’ attitude.
Loss-making
Furthermore, interest rates could rise over the medium term as a result of a weaker sterling, making imports more expensive. This would make borrowing much dearer and exacerbate the lack of affordability within the housing sector. Purplebricks is a relatively low cost operator (in terms of the fees it charges customers), so it is somewhat dependent on high volumes. Therefore, the impact of reduced transactions on its financial performance could be more severe than for traditional estate agents, which tend to charge higher fees.
As a result, Purplebricks seems to be a stock to avoid. It remains loss-making and profitability may now prove much harder to deliver in the coming years.
Meanwhile, Virgin Money (LSE: VM) has been hit exceptionally hard by Brexit. Its shares are down by 42% since Thursday and there could be more pain to come in the short run. That’s because Virgin Money has benefitted greatly from the housing boom of recent years. With house prices likely to fall, its profitability could also endure a more difficult period than was anticipated prior to Thursday’s vote.
Lack of geographic diversity
Certainly, challenger banks such as Virgin have proved popular among investors in recent years. They have offered generally far superior growth figures, compared to their larger and better established peers. However, the lack of geographic diversity offered by Virgin, as well as its relatively narrow product range, means that it is highly geared on the performance of the UK economy.
Uncertainty regarding the UK’s future could weigh heavily on Virgin and investors may therefore wish to await for further information regarding the bank’s post-Brexit performance before piling in.
