Renowned fund manager Neil Woodford sold his holdings in HSBC (LSE: HSBA) (NYSE: HSBC.US), Reckitt Benckiser (LSE: RB) and Smith & Nephew (LSE: SN) (NYSE: SNN.US) within the past year.
Could these stocks be good buys today? Or are they still shares to sell?
HSBC
Having shunned banks since 2002, Woodford began buying HSBC in May 2013 when he was still at Invesco Perpetual. A year later, after leaving Invesco, he included HSBC in the portfolio of his new CF Woodford Equity Income Fund.
Woodford described HSBC as “a very different beast” to the UK’s other banks, being a “conservatively-managed, well-capitalised business with a good spread of international assets”. And he found the valuation attractive: “trading at around or even below its book value and its yield is also appealing”.
However, three months after the launch of his new fund, Woodford ditched his HSBC holding, saying that he was becoming concerned that fines “are increasingly being sized on a bank’s ability to pay, rather than on the extent of the transgression”. He felt that “fine inflation” was an unquantifiable risk that could potentially hamper HSBC’s ability to grow its dividend.
Today, while HSBC continues to trade at around book value with a juicy 5.4% yield, the risk of fine inflation has not gone away. Indeed, since Woodford sold, new issues and further potential penalties have emerged. So, it would seem that the bank is an even less appealing investment proposition now.
Reckitt Benckiser
Consumer goods group Reckitt Benckiser is a stock Woodford had held in his portfolios for more than a decade, the attraction being “a great business with a very strong management team and an excellent product line-up”.
In September last year, Woodford’s team told us: “Such a high quality business deserves a high market rating but the shares have recently become too expensive to continue to justify their position in the portfolio”.
During the month in which Woodford sold, Reckitt’s average share price was £52 and the price-to-earnings (P/E) ratio was 19.6. Today, the shares are trading at around £58.50 and the P/E is 22.1. It would appear that Reckitt has become an even stronger “sell” at the current valuation.
Smith & Nephew
Medical devices firm Smith & Nephew is another holding Woodford disposed of purely on valuation grounds. The shares soared on bid speculation last December, and reached a peak of around £12 in January when Woodford sold. The P/E, based on forecast earnings for the December year end, was 21 and the dividend yield was 1.7%.
Woodford’s team said: “Clearly, if a bid were to materialise, it could lift the share price higher still but we believe other opportunities now offer greater long-term income potential”.
Smith & Nephew’s shares are trading only a little lower today than at their January peak, and the forward P/E and yield are about the same. So, again, it would appear that at the current valuation this is a stock Woodford would be happy to sell in order to redeploy cash in more promising opportunities.
If Woodford is right, potential investors in these three companies should wait for improved clarity on external issues (in the case of HSBC) and a lower valuation entry point (in the case of Reckitt and Smith & Nephew).
