The US stock market is closed today for the US Independence Day holiday – which may provide some time for investors to review which US stocks are currently trading at a discount.
Worries over the British vote to leave the European Union sent global stock markets down on June 24, however stocks in the US started to rally last week as the strong US manufacturing data pushed indexes higher.
It is reported that the US Manufacturing Purchasing Managers’ Index was higher from 50.7 in May to 51.3 in June, suggesting the economic growth in the US caught up in the second quarter of the year. In April consumer spending was revised upwards to 1.1%, the largest single monthly rise since 2009, according to data provided by AXA Wealth Management. As consumer spending accounts for 70% of US GDP, growth in consumer spending leads to growth in the US economy.
“With political outlook across the UK and Europe still unclear the US is attractive as a safe haven. US companies are the best run in the world,” Adrian Lowcock, head of investing at AXA Wealth said, “The US economy continues to look relatively healthy and there are plenty of companies able to grow.”
How does Brexit Affect US Companies?
Morningstar analyst Michael Wong thinks that for capital market-related companies, their earnings may be more affected by the knock-on macro effects of Brexit than the future operational disruption.
“Based on our current understanding, a relatively simple response to Brexit is for institutions to open a subsidiary in the EU to continue enjoying trade privileges similar to the ones in the United Kingdom. Some additional capital may be locked-up for regulatory requirements and duplicative expenses will be incurred, but overall we don’t expect it to be material,” Wong added.
In the long run, if more countries split off the European Union, Wong believes that brokerages, exchanges, and financial information providers stand to benefit.
He also expects a resumption of global merger and acquisition volume growth once the initial Brexit uncertainty is resolved, as Europe participates more fully in this upturn and the US economy continues to grow.
John Rekenthaler, vice president of research for Morningstar reminds investors that it is impossible to know which investment expert will be corrected about a particular crisis, so investors should be cautious when selecting investment managers.
3 Undervalued US Equities
Using Morningstar Select, there are 17 stocks with a five-star rating by Morningstar analysts, meaning analysts believe that they are currently trading at less than their fair value. We reveal three of those undervalued stocks.
Lazard (LAZ) focuses on merger and acquisition advisory, restructuring advisory, and asset management. Lazard has offices in over 40 cities across more than 25 countries and over 2,500 employees.
Lazard has the largest geographic footprint among the independent financial advisory-focused investment banks and is well-positioned when global M&A accelerates, according to Wong.
Recent moves to decrease Lazard's excess cash balances by repurchasing shares, repurchasing debt, and increasing the dividend show an even greater emphasis on returning value to shareholders in the past couple of years.
Greenhill& Co. (GHL) is an independent investment bank that derives the majority of its income from financial advisory. The company focuses on merger and acquisition advisory, but also offers restructuring, government advisory, and asset management fund capital-raising services. Historically, Greenhill has derived about 40% of its revenue outside North America.
As long as the U.S. and the company's business out of the U.K. remain steady, overall revenue should also hold up, since the company's Australian, Asian, and Latin American revenues have already been in the doldrums for the last couple of years and shouldn't be able to fall much further, Wong says. He said that many see the company's dividend as appealing, and while its coverage will be tight, management should be able to maintain it.
State Street Corp (STT) is one of the three largest custodian banks in the United States, built on a series of large acquisitions begun in 2003. As a dominant player with some $28 trillion in assets under custody, State Street has the scale and scope necessary to serve institutional clients, which few competitors can hope to match, according to Morningstar analyst Stephen Ellis.
Ellis expects fee levels to stabilise as the economic environment improves and investors will see the benefit of the business' operating leverage as net interest margins rise. He expects returns on equity to improve from 9.7% in 2014 to around 15% in the medium term. The company's asset management business, about 15% of group profits, is floundering despite positive trends in passive investments, a market where it is a major player.
