While Brexit brings great uncertainty, it also means there’s an opportunity for Foolish investors to profit. It may take time for companies’ valuations to rise, but these two growth stocks offer bright futures and ultra-low valuations.
As a UK-focused stock, Morrisons (LSE: MRW) may be considered somewhat high risk due to the potential effects of Brexit. After all, as has been seen with Unilever and Tesco, a weaker pound could lead to rising prices and higher levels of inflation. This could cause problems for food retailers since competition is high and consumers could easily trade down to budget stores such as Aldi and Lidl.
However, Morrisons has a sound strategy to improve its long-term financial performance. It’s in the process of reducing costs and becoming more efficient. This should allow it to become more competitive on price. This could help it to stave off the competition from no-frills operators. Furthermore, Morrisons is leveraging its capabilities as a food producer through the supply arrangement it has signed with Amazon. This gives it access to what could prove to be a major growth area within the UK food retail space.
Morrisons is forecast to increase its earnings by 36% in the current year and by a further 9% next year. This puts it on a price-to-earnings growth (PEG) ratio of 0.6, which indicates that now could be a good time to buy. Although its outlook could be uncertain and somewhat volatile as Brexit becomes a reality, the retailer has an appealing risk/reward ratio for long-term investors.
Mothercare (LSE: MTC) may also be viewed as relatively high risk following the EU referendum. After all, unemployment is forecast to rise and this could mean that the disposable incomes of families across the UK comes under pressure. However, families tend to prioritise clothing, toys and products for babies and children. Therefore, many of Mothercare’s products could be viewed as near-consumer staples, which means that demand may not come under severe pressure.
Furthermore, the retailer is becoming an increasingly international business. In the last financial year it derived a third of its sales from abroad. This could provide it with a positive translation effect if the pound remains weak. And with the business having a wide geographical spread, its risk profile is reduced. This means that it may offer greater resilience than purely UK-focused companies.
Mothercare is forecast to increase its bottom line by 8% in the current year and by a further 15% next year. This puts it on a PEG ratio of just 0.7, which indicates that it offers a wide margin of safety as well as upward rerating potential. As with Morrisons, its near-term performance may be volatile, but for patient investors, Brexit is a good time to take advantage of market fear and buy good value companies for the long term.
Peter Stephens owns shares of Morrisons, Tesco, and Unilever. The Motley Fool UK owns shares of and has recommended Amazon.com and Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.