Taylor Wimpey, ITV and International Consolidated Airlines Group (IAG) have all rebounded strongly following the UK vote to leave the EU, but Jupiter UK Growth fund manager Steve Davies believes the stocks have a lot further to run.
The UK market tanked with the FTSE All Share index diving more than 7 per cent in the days following the referendum. Since then, however, the market has pushed ever higher, reaching a new record high close on Monday.
Performance of index since EU referendum
Source: FE Analytics
Laith Khalaf, senior analyst at Hargreaves Lansdown, said robust UK equities market performance has belied the sentiment towards the domestic economy.
He said: “Things may be getting tougher for the UK economy this year as rising inflation and weak wage growth look set to dent consumer demand, but the Footsie dances to a different tune.
“It’s worthy of note that the rally we have seen in the stock market has come in spite of poor sentiment, which offers some reassurance because it means the stock market is making progress even though investors are in cautious mood.”
Below FE Trustnet looks at the three stocks which have thrived despite weak sentiment toward the UK economy and could have a lot further to run following their sharp re-rating.
Taylor Wimpey
Valuation was the key factor for investment in all three stocks, according to Jupiter’s Davies (pictured), with share prices falling to compelling levels in the wake of the referendum. 
He said: “They were all companies that I already owned so I knew them very well, we’d done all the work, had built all the models and that sort of thing so I wasn’t having to lots of brand new research.
“Taylor Wimpey is the easiest one. I think the share price got down to 115p and they had already made it clear that they were going to be paying out a total dividend of 14p over the course of the year.
“115p share price and a 14p dividend is a pretty compelling start unless you think that that dividend is totally unsustainable.”
To combat this, the manager went through a “really horrible” stress scenario with the finance director where they looked at the impacts of house prices falling by 20 per cent and volumes down by 30 per cent: a nightmarish scenario and even worse than in 2008.
“And what we learnt was even in those really horrible scenarios, the profits of the company go down a lot, so they halve. But they stop buying land and so the cash coming out of the company doesn’t change that much and it’s the cash that pays the dividend,” Davies said.
“So, when I went through that, it felt to me like you would have to have that horrible scenario and no improvement for two or three years before that dividend would become unsustainable.”
While it is always possible to think of a worse scenario the manager said that this felt like an appropriate doomsday scenario and that if the share price was pricing this in then the odds were pretty well stacked in his favour.
“And what you’ve seen is that house prices have been flat, housebuilder volumes are still very good partly from all the support they get from help-to-buy, and so the cash that Taylor Wimpey and the others are generating keeps going up and up.”
Performance of stock since EU referendum
Source: FE Analytics
Since plummeting on the day after the vote, the company has gained 46.6 per cent and is even above its pre-vote level, as the above graph shows.
However, Davies, who has 3.6 per cent of his £1.45bn fund invested in the stock, believes there is still more growth to come from the company, despite the valuations rebounding.
He said: “I think next year’s dividend could be even higher than the 14p we were envisaging so while the shares have bounced back to close to £2 I still think they have a long way to go.
“If the dividend can grow to 15, 16 or 17p on any kind of normal of yield that might get you to a share price in the high 200s rather than where we are at the moment.
“It was the right thing to do to buy them in July last year but I’m not rushing to sell any of them.”
IAG
The British Airways owner is the seventh largest holding in the Jupiter UK Growth fund, which is 4.1 per cent weighted to the stock.
“People think because it’s an airline it is just inherently unstable and cyclical but they’ve got four or five different brands now and its different economic cycles they are exposed to,” Davies said.
“It has rebounded a lot and we are now around £6 because they had some good results recently but again it still looks very cheap.”
The stock is up 21.29 per cent since it crashed following the Brexit vote and is easily ahead of its pre-vote levels.
Performance of stock from since its lowest point on 27 June 2016
Source: FE Analytics
The fund manager said: “People had all sorts of concerns with them – one was just the idea that people are going to fly less, whether it is Brits going abroad or corporate travel.
“You then had what kind of regime British-based carriers are going to operate at if you’re flying within Europe though this is more of an issue for the easyJet’s of this world than IAG but clobbered the whole sector.
“Then you had a bit of a rebound in the oil price as well which is their biggest single input cost. But it’s a really well-placed company, they are starting to see their passenger yields flatten out now, the oil price is coming off again and it’s still very cheap.”
Despite the strong rebound, the manager said the company is on a price-to-earnings (P/E) multiple of between six and seven times.
“IAG makes a very good margin, a good return on capital and now churns out a lot of cash – if you took the name off the tin and pretended it was an engineering company it would probably be trading on a 15 times multiple rather than a six or seven times multiple.”
ITV
Sticking with the three-letter acronyms beginning with ‘I’ is ITV, the final company Davies bought after the Brexit vote but which he remains convinced is still cheap.
He said: “ITV is a much better business than it was in 2008/9. At the time of the Brexit vote the assumption – and it’s been correct – was that the economy would be moderate at best and so the spend on TV advertising goes down quite a bit and you’ve seen that.
“The old structure of ITV, where it was entirely reliant on TV advertising (and it had a very weak balance sheet) would have meant profits falling off a cliff.”
However, he says chief executive Adam Crozier has spent the last seven years building up the content side of the business – so making programs to be sold all around the world, which is much less cyclical.
“They’ve also got a much higher balance sheet as well so you don’t have weak operational performance exacerbated by a stressed balance sheet as well,” Davies said.
While he concedes that the advertising part of the business remains “tricky” with business confidence waning a bit more than consumer confidence over recent months, the underlying earnings of the business have held up pretty well.
“I worked out the worst earnings number I could think of and I think it was about 15p and the share price got to around 150p or something like that,” he noted.
“Ten times a trough earnings figure for a company with a good balance sheet and a bit of M&A potential,” he said offers investors an attractive proposition, despite the company rebounding 32.71 per cent since its bottom closing price on 27 June 2016.”