Mike Bailey, CFA, Director of Research at FBB Capital Partners, where he manages the research and investment selection for the firm’s $900M in assets under management, located in Bethesda, MD.
Our post-Brexit playbook involves offense and defense. In terms of offense, CME Group benefits from the rising volatility stemming from the Brexit and the looming UK / EU divorce, while Fortive Corporation and UnitedHealth Group are more defensive, with either a self-help theme (FTV) or a U.S. domestic-oriented strategy (UNH).
CME Group (CME): Embracing the post-Brexit volatility. We believe CME is a way to own a theme of rising uncertainty as the UK follows an unproven path out of the EU. CME’s volume growth will be driven as frequent trading and higher market volatility post-Brexit should pull the volatility index closer to historical levels. Separately, uncertainty on the timing of the Fed’s next rate hike should drive the stock higher. The other important aspect of CME is the company’s under-appreciated dividend. Even if volatility dips back down, CME stockholders are getting paid to wait as the company’s dividend yield approaches 5%. Of note, the company has consistently paid an optional year-end dividend for years.
Fortive Corporation FTV: Self-help theme a good defense against macro concerns. FTV is a spinoff from another stock we have been watching closely, Danaher Corporation (DHR), that is currently trading on a when-issued basis with full trading set to begin on July 5th. FTV is a collection of DHR’s slower growth testing, measurement and transportation businesses. While this company profile may sound less-than-exciting, the new FTV spinoff has major upside ahead in our view as the company goes global, digital, and deal-hunting. FTV is in the early innings of non-U.S. market penetration and the company is working to connect the Internet of Things to its catalog of industrial equipment. Finally, FTV is chomping at the bit to do $2-3B worth of acquisitions (for a company with $6B in sales), despite the fact that the prior management team at DHR de-prioritized deals for FTV’s business units over the past five years.
UnitedHealth Group (UNH): Plenty of growth on this side of the pond. UNH generates more than 95% of its sales from inside the U.S. and our three-pronged investment thesis for the company relies on purely domestic growth drivers, reducing Brexit-related concerns. The first part of our thesis involves UNH’s pending exit from unprofitable state health exchanges, which will likely boost 2017 results. Second, we expect UNH to gain share as the company’s top managed care competitors remain distracted with either completing mergers or trying to salvage questionable deals. Finally, UNH’s non-insurance business, Optum, continues to drive upside as it digitizes health IT, cuts wasteful drug spending, and manages growing doctor networks that offer low cost, high quality care.
Disclosures: Mike Bailey and FBB Capital own stock in all three.