5 British Stocks To Profit From A Weak Pound Sterling

On Aug 31, Michel Barnier, the EU’s chief negotiator at the Brexit talks expressed concern over the lack of “decisive progress” on major issues. And this uncertainty on Brexit negotiations has begun to weigh on Britain’s economy and the pound sterling. The pound sterling has lost nearly 7% versus the euro till now this year, mirroring in many ways the fate of these two economies.

Yet, there is a silver lining in the pound’s fall, benefits of which Britain experienced in the early days of Brexit. The pound’s decline led to windfall gains for the country’s exporters which helped to shore up Britain’s economy. Now, even as the economy seemingly struggles, companies exporting products and services stand to benefit from a weaker pound. This is why it makes good sense to pick up such stocks at this point.

Britain, EU Diverge Economically

According to the latest Eurostat estimates, the Eurozone expanded by 2.3% year-over-year during the quarter ended June. This is the sharpest pace of growth experienced since the first quarter of 2011. On an annualized basis, the economic bloc exhibited a 2.6% pace of growth during the second quarter.

In contrast, Britain’s economy expanded at a sluggish 0.3% pace during the same period. Further, the annualized pace of growth for the first half of this year came in at only 1%. The reason for such changed circumstances is not hard to seek. The economic uncertainty unleashed by Brexit is the primary cause of Britain’s economic woes.

British Firms to Gain from Pound’s Pain

Brexit related concerns have also led to a substantial decline in the value of the pound, particularly versus the euro. And this is the one payoff which British companies can look forward to amid the economic gloom. Advantages for companies domiciled in Britain are twofold in this case. First, earnings of exporters of goods and services rise with a decline in the value of the pound.

Second, Britain’s companies have the opportunity to grow their market share in foreign markets by pushing up sales. According to JPMorgan Chase & Co.’s (NYSE:JPM) asset management division, this can be achieved because British products have become cheaper in foreign currencies. Even though it may be tough to quantify such an outcome, it is already adding to the attractiveness of stocks from Britain, according to the financial major.

Analysts at Barclays (LON:BARC) PLC (BCS) go a step further to suggest that companies from Britain should utilize the pound’s weakness to reduce prices in order to capture a larger share of foreign markets.

Our Choices

It is true that the pound’s decline mirrors the fortunes of the British economy. However, companies based in the country stand to gain by exporting products and services priced in a cheaper currency. Not only should this lead to a jump in earnings, it could also help such firms expand their market share abroad.

Adding stocks gaining from this trend to your portfolios looks like a smart option at this point. However, picking winning stocks may be difficult.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM Score.

Nomad Foods Limited (NYSE:NOMD) is a manufacturer and distributor of frozen foods which operates across the United Kingdom, Italy, Germany, Sweden, France and Norway.

Nomad Foods has a Zacks Rank #1 (Strong Buy) and a VGM Score of B. The company has expected earnings growth of 20.7% for the current year. Its earnings estimate for the current year has improved by 12.1% over the last 30 days. Nomad Foods has returned 48.9% year to date, outperforming the industry it belongs to, which has lost 7.8% over the same period.

Vodafone Group Plc (NASDAQ:VOD) is a telecom company which operates on a global basis. Vodafone is headquartered in Newbury, U.K.

Vodafone has a VGM Score of A. The company has expected earnings growth of 17.2% for the current year. Its earnings estimate for the current year has improved by 1% over the last 30 days. Vodafone has returned 21.2% year to date, outperforming the industry it belongs to, which has gained 12.5% over the same period. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Smith & Nephew (LON:SN) plc (NYSE:SNN) is a global medical device company headquartered in London.

Smith & Nephew has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of 9.1% for the current year. Smith & Nephew has returned 22.3% year to date, outperforming the industry it belongs to, which has gained 19.4% over the same period.

Diageo (LON:DGE) plc (NYSE:DEO) operates in approximately 180 countries and is involved in producing, distilling, brewing, bottling, packaging as well as distributing spirits, wine and beer. Diageo is headquartered in London.

Diageo has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 11% for the current year. Its earnings estimate for the current year has improved by 3.1% over the last 30 days. Diageo has returned 32.8% year to date, outperforming the industry it belongs to, which has gained 21.1% over the same period.

Associated British Foods (LON:ABF) plc (OTC:ASBFY) is a diversified international food, ingredients and retail group headquartered in London.

Associated British Foods has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 15% for the current year. Associated British Foods has returned 27.5% year to date, outperforming the industry it belongs to, which has lost 7.8% over the same period.

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