Three Strategies for Handling Brexit

Markets sold off sharply on Friday following the United Kingdom’s vote to exit the European Union (EU). The Dow Jones fell 1.55%, the S&P 500 dropped 1.63% and the NASDAQ tumbled 1.92% to close a negative week. The MCSI Emerging Markets Index also pulled back 1.89% for the week.

Your recent small-cap bets fared particularly well, with big gainers including Healthcare Services Group, Inc. (HCSG) rising 1.73%, Drew Industries Incorporated (DW) gaining 1.49% and Allete, Inc. (ALE) adding 1.15%. Drew Industries also hit a new 52-week high.

As the fallout from the United Kingdom’s vote to exit the EU on Thursday continues into today’s trading, investors are still assessing the impact of this monumental vote.

As a general rule, there are three ways to react in times of financial crisis.

First, you can sit on your hands and wait for the dust to settle. In other words, resist the temptation to “do something.” In the words of investor Jim Rogers: “Don’t play. Just don’t play.”

Second, you can search for and invest in “safe haven” assets like the CurrencyShares Japanese Yen ETF (FXY), Vanguard Total Bond Market ETF (BND) or the ultimate “the sky is falling” fund, SPDR Gold Shares (GLD). All three of these funds rose on Friday, even as stock markets around the world lost a total of $2.1 trillion — the equivalent of 70% of the entire U.K. economy.

Finally, you can embrace the crisis, and look for “once in a decade” trading opportunities. An example of this strategy would be to make an aggressive bet on hard-hit European banks.

The Stoxx Europe 600 Banks index fell 14% on Friday, compared with a decline of just 7% in the broader European index. U.K. bank Barclays PLC (BCS) was one of the hardest hit, with its shares falling nearly 30% in early trading before clawing its way back to close down 20%. Other European banks also sold off sharply, with Switzerland’s Credit Suisse Group AG (CS) closing down 16% and Spain’s Banco Santander, S.A. (SAN) tumbling 20%, as investors feared Brexit would both harm investment banks’ cross-border business and spur an economic slowdown.

If you believe that the negative impact of Brexit is overblown, as I broadly do, then these banks each offer a terrific trading opportunity. In fact, in my view, the long-term economic implications of Brexit for the United Kingdom will be positive, mirroring the successes of Switzerland and Norway, both of which are thriving outside of the European Union.

At the same time, placing a bet today is only for the most aggressive of investors. So although I am highlighting these opportunities, I am not going to make formal “buy” recommendations on them.

I’ll be back with a new Bull Market Alert recommendation next week.

Portfolio Update

iShares MSCI Emerging Markets (EEM) moved 1.89% lower last week. Although most EEM holdings are not directly subject to “Brexit” fallout, EEM fell on the uncertainty surrounding the news that the United Kingdom was leaving the European Union. EEM is just below both its 50-day and 200-day moving averages (MA) and is a HOLD.

The TJX Companies, Inc. (TJX) dipped 1.31%. Like most stocks, TJX could not help but lose ground last Friday. Events like Brexit are “Black Swan” events, and just don’t happen that often. However, when they do, almost no scalp goes unscathed. On a positive note, I expect that stocks like TJX will rebound to their pre-Brexit levels quite quickly. TJX is a HOLD.

Healthcare Services Group, Inc. (HCSG) rose 1.73%. HCSG seemed to “Keep Calm and Carry On” just fine last week despite the negative happenings. Although HCSG dipped on Friday, it managed to make nearly a full intra-day recovery and remain above its 50-day MA to stay as a BUY.

Drew Industries Incorporated (DW) gained 1.49%. With the exception of Friday, DW turned in strong trading days every day last week. DW also pushed to a new 52-week high on Thursday. With U.S. market futures looking flat early this morning, DW just might have the momentum to make a full recovery from its previous dip and return to its nearly unbroken recent string of daily gains. DW is a BUY.

Spire, Inc. (SR) added 0.94% for its first week in your portfolio. Spire’s plans to acquire Mobile Gas and Willmut Gas, which will be funded in part by $165 million worth of senior unsecured notes from institutional investors. The funding will consist of $35 million in five-year notes and $130 million in 10-year notes. The five-year notes are expected to bear interest between 2.49% and 2.61% annually, and the 10-year notes between 3.11% and 3.19%. SR is a BUY.

Sincerely,

Nicholas A. Vardy