At this point, it’s impossible to predict what the future holds for the UK, both politically and economically. However, what we do know is the country won’t be the same after the general election. Every political party is promising something different, which makes it extremely difficult for investors to plan ahead.
That said, some companies are likely to be impacted more than others, no matter what the outcome.
Auto Trader (LSE: AUTO) is one I think is going to suffer from uncertainty more than most. As the country’s largest digital automotive marketplace, it relies on a healthy stream of interest from buyers and sellers to generate profits.
While the company has outperformed this year, the UK economy is stagnating, and this is already impacting car sales across the country. If the political stalemate continues, I think the situation is only going to get worse, and Auto Trader won’t be able to avoid the decline forever.
With the stock trading around 24 times forward earnings, there’s already a lot of optimism baked into the shares. If the company disappoints on growth, the stock could re-rate substantially as the rest of the sector is dealing at a median P/E of 1.5%. A dividend yield of only 1.5% doesn’t offer much consolation either.
If the general election results in a Labour majority, it could be bad news for the country’s utility companies. Labour has repeatedly promised to nationalise key industries if it gets into power. While I think the likelihood of this happening is low, it’s still not something I’d want exposure to in my portfolio.
That’s why I think it could be a good idea to sell shares in Severn Trent (LSE: SVT). Not only is the company at risk of nationalisation, but the stock also looks expensive.
Shares in the water business are currently dealing at a forward P/E of 19.1 and a price to book value of 4.7. The median book value of UK water companies is just 1.9, implying shares in Severn Trent are overvalued by around 1.5%.
There’s also a good chance the company’s 4.4% dividend yield could be under threat as well as regulators are taking a much stricter line utility providers’ allowed profit margins. All in all, it seems to me that the risks of investing in Severn Trent far outweigh the rewards here.
Finally, I wouldn’t want to own National Grid (LSE: NG) going into the general election. This company is exposed to the same nationalisation risks as Seven Trent, and is also under attack from regulators.
The firm is currently battling Ofgem over its plans to connect the giant Hinkley Point nuclear power plant to the grid when it’s complete. Ofgem thinks the cost is £80m higher than it should be, but National Grid disputes this claim and is planning to provide further evidence to support its argument.
I think this battle shows how Ofgem is looking to get more value for money from suppliers, and that’s bad news for National Grid’s bottom line, as well as its 5.5% dividend yield.
Nationalisation might not happen, and the company might be able to boost profits with other methods, but I think there are better investments out there that come with less risk.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Auto Trader. 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.