Interactive Investor

Time to own these three American giants?

22nd June 2016 11:59

Lee Wild from interactive investor

The referendum on Britain's membership of the European Union (EU) has caused a level of volatility in financial markets not seen since the February crash. One week the 'Leave' campaign looks set to claim a surprise win; days later it's 'Remain' that's out in front.

For investors, this causes problems. Interactive Investor ran a poll last month asking them whether the vote had affected their investment behaviour. Almost three in five were trading as normal regardless of the referendum, but 18% said they were sitting on cash ready to invest only after a 'Remain' vote on 23 June.

A follow-up poll again showed that a significant number still had not changed their trading strategies, but, interestingly, 10% of respondents said they had increased exposure to overseas assets in the belief that sterling could fall further.

Buying international shares, which have significant non-UK and non-EU revenues - US companies are an obvious favourite - is being used as a hedge against Brexit.

Overseas firms are less-affected by what's going on here, and converting assets back into sterling when the pound is weak - the UK currency is tipped to plunge by 20% in the event of Brexit - is a clear positive for returns. There's talk that a 'Leave' vote could also delay a next hike in US interest rates to December or even 2017, another boon for equities.

To coincide with Interactive Investor's offer of commission-free trading all this week, we've highlighted three US stocks which have proved popular among investors in 2016.

Microsoft's new growth engine

Everyone's heard of Microsoft. It's one of the most successful technology companies of all time. At its height, nine out of every ten computers ran a version of Microsoft Windows, and anyone who's used a PC or laptop will be familiar with its Windows operating system.

As one of the most powerful companies in the world under Bill Gates, Microsoft was worth a colossal $600 billion (£409 billion) during the dotcom boom and is currently generating over $93 billion of revenue a year.

Times are changing, however, and the company's traditional software business is under threat. It's where Microsoft makes most of its money, but chief executive of two years Satya Nadella is a savvy fellow and is already driving a push to new cloud-based products. Even more money is likely to be thrown at the project to speed things up.

Falling sales of phones and PCs demonstrate the need for change. It's why third-quarter revenue missed expectations, and why the company warned that sales in the final quarter would also disappoint.

This only emphasises the need to find growth. And Microsoft has decided it's far quicker to buy it, which explains the decision to pay over $26 billion, or for $196 per share, for professional networking website LinkedIn. That's a 50% premium to the previous session's closing price, but still way less than LinkedIn was worth seven months ago when it warned that 2016 would not be as strong as expected.

Microsoft has a poor track record of making mega-deals work - think aQuantive in 2007 and the Nokia handset business purchase in 2014 - but this is Nadella's first big acquisition since taking charge, and will most likely be given time to prove he's got a bargain and that he can succeed where predecessors have not.

High-speed Tesla

Tesla makes fast cars. The quickest get from 0-60 miles per hour in less than 3 seconds. That's fast, but what makes Tesla special is that these hotrods are electric.

Billionaire entrepreneur Elon Musk has been involved at Tesla for much of its 13-year history. He's nothing if not ambitious, and has just called for engineers to help him build one million all-electric cars a year by 2020. That's a ten-fold increase in just four years, and a massive ask.

Super-confident Musk, Tesla's largest shareholder, also wants to get annual production at the loss-making carmaker to 500,000 in 2018. Almost 400,000 people have already placed orders for Tesla's Model 3, of which around half are expected to be delivered in 2017.

The $1,000 deposits have helped bolster Tesla's finances, but there is a risk it will need to sell more shares to bankroll the business. Indeed, Musk has just announced he wants to offload $2.5 billion of shares to fund the purchase of solar panel maker SolarCity. That it's another Elon Musk company – he has a 22% stake – has left a nasty smell, and investors are selling Tesla shares.

It remains to be seen whether Tesla's army of fans view the sell-off as a buying opportunity.

Apple ripe for picking

Arguably the ultimate brand, Apple is a company like no other. Under the late Steve Jobs, Apple's founder and chief executive, it invented the iconic iPod, iPhone and iPad, which made both Jobs and the company rich beyond belief.

Indeed, last year under new boss Tim Cook the company generated $233 billion of revenue and made a profit of $53 billion. Even after losing over a quarter of its market value in the past year, the business is still worth well over half-a-trillion dollars and ranks as the largest tech firm in the world.

Things haven't exactly gone smoothly for the Californian giant recently. In April it announced the first ever decline in iPhone sales, which triggered the first decline in quarterly revenue in 13 years.

Apple shares had already fallen from their peak at almost $133 this time last year, and a recovery since the wider stockmarket sell-off in February ended a partial recovery. They're up from their two-year low of $89.47 reached a month ago, yet still trade on just 11.5 times earnings per share estimates for the year to September 2016. On 2017 forecasts it's less than 11 times.

That's a discount to the average price/earnings ratio since 2010 of 13 times, which should offer some support. On that multiple, Apple shares would be worth about $115.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.