These Brexit winners could make you a mint

Roland Head highlights two stocks whose profits are rocketing thanks to the weaker pound.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

This week’s Article 50 declaration means that the UK is formally committed to Brexit. But many stock market investors are already sitting on comfortable profits as a result of the UK’s surprise decision to leave the EU.

The sudden devaluation of the pound that followed last summer’s referendum has not been reversed. This means that companies which trade in US dollars but report in pounds are reporting significant profit growth thanks to this shift in exchange rates.

Shareholders have already benefitted from these gains, but if exchange rates stay as they are, I believe there could be more upside to come.

An extra £300m for you?

The UK’s second-largest tobacco group, Imperial Brands (LSE: IMB), said today that it expects “a currency translation benefit on net revenue and profit of about 13%-14%”. That equates to a £300m boost to the company’s post-tax profits.

Conveniently, this offsets the £300m Imperial is spending on improving the marketing of its key brands. Although the two amounts don’t directly cancel each other out in accounting terms, this currency boost does seem to mean that management is able to spend more without cutting shareholder returns.

It’s not all good news

Before we get too carried away, I think it’s worth pointing out a couple of risks faced by Imperial shareholders.

The first is simply that the global market for cigarettes is shrinking. The only way to deliver volume growth is by taking market share from competitors, or through merger activity. In today’s trading statement, Imperial reported “deterioration in industry volumes” during the first half of the year. Pricing and the mix of products sold were reported to be flat on last year.

Despite this, it expects half-year and full-year profits to be in line with current guidance. This puts the stock on a forecast P/E of 14, with a prospective yield of 4.5%. Those are reasonably attractive figures, but my reading of the company’s commentary is that profits might be falling without the benefit of the weaker pound.

I’d continue to hold Imperial for its dividend income, but I wouldn’t rush to buy more at current levels.

This small-cap looks more exciting

Small-cap ingredients manufacturer Treatt (LSE: TET) is also enjoying double-digit profit growth. But unlike Imperial, Treatt isn’t depending on the weak pound to boost profits.

In a trading update on Thursday, management upgraded full-year earnings guidance for the second time in just two months. “New business wins and a strong performance across all our categories” are expected to lead to earnings above the current forecast level of 17.2p per share, it said.

The firm’s sales growth certainly seems impressive. First-half revenues are expected to be more than 25% higher than during the same period last year. Only 10% of this is down to currency rates, suggesting underlying sales growth of more than 15%.

I estimate that Treatt’s earnings per share could rise by as much as 40% this year. The shares now trade on a demanding forecast P/E of 20 with a yield of just 1.4%. But this profitable and cash-generative company is growing fast and has strong momentum. I’d certainly hold at current levels and would consider using any future dips to buy stock.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »