Investors Flee Brexit


The U.K.'s June 23 vote to leave the European Union caught investors by surprise, contributing to a broad — though possibly brief — slump for stocks. The S&P 1500 Index tumbled 5% in the first two trading days following the referendum. The utilities sector rose 1%. But the index's other nine sectors fell — none more than materials and financials, both down 8%. Stocks have snapped back since June 27, recouping more than half the two-day slump.

We present below recommended stocks that broke out sales in the past fiscal year for the U.K. and Europe. Twelve of our stocks generate at least 80% of sales in the U.S.
Company (Price; Ticker)
Est. % Of
In U.K.
United Kingdom
LKQ ($31; LKQ)
CBRE Group ($27; CBG)
Alphabet ($695; GOOGL)
Laboratory Corp. ($129; LH)
Shire ($181; SHPG)
Company (Price; Ticker)
Est. % Of
Sales In
Lear ($103; LEA)
37 *
Citrix Systems ($81; CTXS)
29 **
Foot Locker ($55; FL)
28 †
CBRE Group ($27; CBG)
28 **
LKQ ($31; LKQ)
F5 Networks ($113; FFIV)
24 **
Gilead Sciences ($82; GILD)
Apple ($94; AAPL)
Biogen ($239; BIIB)
J.P. Morgan Chase ($61; JPM)
15 **
Disney ($97; DIS)
Owens Corning ($50; OC)
Nvidia ($47; NVDA)
Company (Price; Ticker)
Est. % Of
In U.S.
Centene ($71; CNC)
CVS Health ($94; CVS)
D.R. Horton ($31; DHI)
EQT Midstream ($78; EQM)
Kroger ($36; KR)
Southwest Airlines ($39; LUV)
CDW ($40; CDW)
Amerco ($374; UHAL)
Alaska Air ($58; ALK)
Laboratory Corp. ($129; LH)
Robert Half Int'l ($37; RHI)
Comcast ($64; CMCSa)
* Includes sales from Africa.     ** Includes sales from Africa and the Middle East.    
† includes sales from Canada.

Policy makers have scrambled to assure investors of Britain's resilience. But Goldman Sachs ($146; GS) predicts that the U.K. will fall into a mild recession by early 2017. Of greater concern is the prospect of Britain's problems spilling over into other countries, hurting global confidence in an already a sluggish environment. Goldman also trimmed its growth forecasts for Europe and the U.S.

The full effects from Britain's EU departure won't be known for some time. But it's worth noting that U.S. direct exposure to Britain is small. The U.K. represents about 4% of U.S. exports. Below we look at how the exit could affect some of our recommended stocks.

Retail and consumer stocks

Retailers and consumer-discretionary companies with U.S.-focused operations should hold up fairly well. Shares rallied for Kroger ($36; KR), which operates exclusively in the U.S. Although Foot Locker ($55; FL) drew on Canada and Europe for about 28% of revenue last year, it says the U.K. is not significant to results. Comcast's ($64; CMCSa) business also looks to be well insulated from the U.K.'s troubles.

On the opposite end of the spectrum, LKQ ($31; LKQ) shares plunged 12% in the two days following the referendum. The company is a leading provider of automobile-replacement and -maintenance products in the U.K. It generated 19% of sales from the U.K. last year, more than any other recommended stock.

Separately, Kroger raised its quarterly dividend 14% to $0.12 per share, payable Sept. 1. The dividend hike coincides with a fresh $500 million stock-buyback program, representing about 1% of outstanding shares. Comcast and LKQ are Focus List Buys and Long-Term Buys. Kroger and Foot Locker are Buys and Long-Term Buys.

Financial stocks

U.K. subsidiaries account for 8% of J.P. Morgan Chase's ($61; JPM) revenue, say analysts, versus 6% for Bank of America ($13; BAC), 12% for Morgan Stanley ($25; MS), and 18% for Goldman. Several U.S. banks may also be forced to reorganize their European operations by moving offices out of the U.K. More troubling for banks is the prospect of interest rates remaining low. J.P. Morgan now expects the Federal Reserve to hold off raising U.S. rates until December; it had previously predicted a rate hike in September. Separately, J.P. Morgan said the Fed approved its plan to repurchase up to $10.6 billion of stock over the next 12 months, or 5% of outstanding shares. The bank has no plans to increase its dividend right now.

Shares of CBRE Group ($27; CBG) plunged 17% in two days on fears that real estate transactions may suddenly get delayed or canceled. CBRE tried to calm investor jitters by saying the U.K. accounts for about 10% of "normalized" operating income, though 18% of 2015 revenue came from the country — second-highest among our recommended stocks. CBRE is a Buy and a Long-Term Buy. J.P. Morgan is a Long-Term Buy. Bank of America and Morgan Stanley are rated B (average). Goldman is rated C (below average).

Health-care stocks

The U.K. accounts for just 3% to 5% of the global pharmaceutical market, according to Goldman, limiting direct exposure for Gilead Sciences ($82; GILD) and Shire ($181; SHPG). Gilead generated 23% of revenue from Europe last year but does not break out U.K sales. Ireland-based Shirerelies on the U.S. for 73% of sales, versus an estimated 3% of sales from the U.K. and less than 1% from Ireland.

Britain's EU exit could generate more growth for Laboratory Corp. of America ($129; LH) and other companies with contract research organization (CRO) businesses. CROs, which help drugmakers gain regulatory approval for new treatments, may see higher demand if the U.K. adopts regulations that differ from existing EU rules. LabCorp currently draws on the United Kingdom for about 3% of sales.

Nearly lost in the commotion, Gilead and Shire announced encouraging developments from their pipelines. Gilead won U.S. approval for Epclusa, the first drug to treat all six major forms of hepatitis C. Epculsa combines Sovaldi with a new antiviral drug. It will cost $74,760 for a 12-week regimen, below the $84,000 price tag for Sovaldi when the drug was launched in 2013. Gilead has close to a 90% market share for hepatitis C drugs. Separately, the European Commission granted Gilead approval to sell Odefsey, a new HIV treatment.

Meanwhile, Shire said a potential new drug to treat adults with attention-deficit hyperactivity disorder (ADHD) performed well in a recent study. The upbeat results strengthen expectations that Shire can extend its franchise of ADHD drugs, accounting for 34% of sales last year. Shire hopes to win approval for this drug in the second half of 2017. Shire is a Long-Term Buy. Gilead and LabCorp are Buys and Long-Term Buys.

Corporate roundup

The European Union may bring new antitrust charges against Alphabet ($695; GOOGL) as soon as August, reported The Wall Street Journal. The investigation focuses on claims that Alphabet's core advertising business abuses its dominant position. Alphabet's shopping service and Android operating system have also run into trouble with the EU in recent years.

Amerco ($374; UHAL) named Jason Berg as its new CFO. He was previously the company's chief accounting officer. Amerco is a Focus List Buy and a Long-Term Buy.

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No changes were made this week in Dow Theory Forecasts.

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