Will Tesco plc, Staffline Group plc and Connect Group plc’s UK focus prove to be toxic post-Brexit?

Should you avoid these three UK-focused stocks? Tesco plc (LON: TSCO), Staffline Group plc (LON: STAF) and Connect Group plc (LON: CNCT).

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Shares in UK-focused recruitment company Staffline (LSE: STAF) are flat today after it released a solid trading update. Encouragingly, trading in the first six months of the current financial year is in line with expectations and Staffline has experienced no drop-off in demand following the EU referendum.

Looking ahead, Staffline remains upbeat about its prospects. It’s expected to record a rise in earnings of 4% in the next financial year, but clearly the outlook for the UK jobs market is highly uncertain. There’s a real risk that the UK economy will experience a slowdown and potentially a recession, so investors in Staffline must seek out a wide margin of safety in order to maintain a favourable risk/reward ratio.

Following Staffline’s share price fall of 33% since the referendum, its shares now trade on a price-to-earnings (P/E) ratio of just 6.9. Therefore, they’re dirt cheap and even though earnings downgrades are relatively likely, they still appear to be worth buying for the long term.

Connecting the dots

Also reporting today was fellow UK-focused stock Connect Group (LSE: CNCT). The distribution company’s sales increased by 2.1% versus the same 44-week period in the previous year, with its Parcel Freight division performing well and recording a rise in sales of 10.2%. This was driven by a continuation of strong market growth and new customer wins, while Connect’s Book division saw revenue rise by 1.1%. This was despite tough conditions in UK Libraries, which were partially offset by the continuing growth of Wordery and a good performance in Wholesale.

Looking ahead, Connect Group is expected to increase its earnings by 4% in the next financial year. Clearly, there’s scope for this figure to come under pressure due to the company’s UK-focus, although Connect Group has strong cash flow and operates in large and resilient markets. And due to it having a P/E ratio of 7.4, there appears to be a sufficiently wide margin of safety to merit purchase by long-term investors.

Lean, mean streamlined machine?

Meanwhile, Tesco (LSE: TSCO) is becoming increasingly UK-focused as it sells off international assets and concentrates on turning around its UK grocery operation. This strategy seems to be a sound one in terms of generating efficiencies and creating a leaner and more streamlined organisation. However, it also means that Tesco will be less diversified and more dependent on the UK economy.

Due to the current uncertainty regarding UK economic growth, Tesco’s shares could disappoint somewhat in the short run. That’s because investor sentiment may be held back by the uncertainty the country and its economy faces. However, Tesco’s share price will also be driven to a large extent by its ability to execute the current turnaround strategy, which seems to be progressing well so far.

For example, it’s forecast to record a rise in earnings of 41% in the next financial year and with a price-to-earnings growth (PEG) ratio of only 0.5, it seems to have a very wide margin of safety. This means that even if its outlook deteriorates as a result of a slowing UK economy, its share price could still outperform the wider index over the medium-to-long term.

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.

Peter Stephens owns shares of Tesco. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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