There has been quite a bit of angst across global financial markets since the UK electorate voted to leave the European Union (EU). Investors flocked to safety, looked for yield, sought out dollar-denominated revenues and sold European-exposed companies. While you’d be hard pressed to call the two-day sell-off post-Brexit a market panic, it was at least a change in mindset for many investors but not really one for us. As small-cap value investors, we didn’t find there was much cause for concern.
One of the primary reasons for this is that our investment world is primarily driven by microeconomic, not macroeconomic considerations. When we look to identify opportunities, we apply bottom-up, individual stock research. When we looked at the small-cap investment universe, post-Brexit, it became clear relatively quickly that it offers what the market is now looking for―stability, yield and domestic, U.S.-dollar-denominated revenues. Unlike the post-Lehman Brothers collapse world, where domestic demand stopped almost immediately, Brexit is literally an ocean away from the vast majority of our holdings.
What Investors Are Looking for Post-Brexit
In that light, I thought it would be interesting to cite a few examples of holdings1 that we think display the qualities the market is looking for:
Stability: National Beverage Company (FIZZ) is the owner of the La Croix sparkling water brand, best known for its unique flavors that have no sodium or artificial flavoring and zero calories. As a low-cost indulgence for consumers, La Croix has achieved almost cult-like status on social media with proud drinkers posting pictures of fridges filled with their favorite flavors. Even if the economy does slow, demand for this U.S. only, staple-like product is unlikely to change much.
Yield: Communications Sales & Leasing (CSAL) is a REIT (Real Estate Investment Trust) yielding just over 8%, even after delivering 57% price appreciation year-to-date. CSAL started off as the owner of Windstream Holding’s fiber and copper infrastructure assets but now is strategically buying network assets from other telecom operators across the United States and charging them back rent plus inflation for the use of those assets. While their revenues are still primarily from Windstream, we believe CSAL will have a more diverse and growing revenue base in the future.
U.S.-dollar-denominated revenues: LGI Homes (LGIH) is a U.S homebuilder focused exclusively on the entry level home buyer, who is moving out of rental property into their first home, usually in the $250,000 and under price range. We like this business model because of the lack of competition from other builders at these price points, low mortgage rates, and LGIH’s unique strategy of pre-approving buyers before they’re offered tours of homes. There are few businesses more domestic, and less impacted by Europe, than an entry level homebuilder.
While we are always vigilant about assessing how macro changes could impact our small-cap portfolio, Brexit looks to be a non-event to us, when seen through our small-cap value lens. As we said, Brexit happened and small-cap stocks don’t care.
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1 As of June 30, 2016, National Beverage constituted Company constituted 0.79% of Oppenheimer Small Cap Value Fund; Communications Sales & Leasing, 0.90%; and LGI Homes, 1.19%. It should not be assumed that an investment in the securities identified above was or will be profitable and do not constitute recommendations by OppenheimerFunds.
Small-sized company stock is typically more volatile than that of larger company stock. It may take a substantial period of time to realize a gain on an investment in a small-sized company, if any gain is realized at all. Diversification does not guarantee profit or protect against loss.
These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.