Have £1k to invest? I think the GSK share price could crush the FTSE 100 this year

Roland Head explains why he thinks this could be the right time to buy FTSE 100 (INDEXFTSE:UKX) pharma group GlaxoSmithKline plc (LON:GSK).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

FTSE 100 pharmaceutical giant GlaxoSmithKline (LSE: GSK) is often branded as a stock to buy and hold forever. But the shares have actually performed quite poorly for much of the last 25 years.

Over the last 10 years, shares in the pharma group have risen by just 30%, compared to a 63% gain for the FTSE 100.

These figures don’t include dividends, but data provided by Morningstar indicates that over the last 10 years, Glaxo stock has provided an average total return (share price + dividends) of just 6.3% per year. The equivalent figure for the FTSE 100 over the same period was 9.3%.

Big changes are coming

Given Glaxo’s rather ordinary track record, you might wonder why I’m suggesting it as a potential buy. The answer lies in the changes set in motion by chief executive Emma Walmsley since March 2017.

The group’s diverse mix of pharmaceuticals, vaccines and consumer healthcare brands has been blamed by many in the City as a cause of underperformance. Simply put, many investors think the group lacks focus. Weaker divisions are supported by profits made elsewhere.

Ms Walmsley appears to share this view and has set a series of changes in motion that will see the consumer healthcare business combined with that of Pfizer. This joint venture will then be spun out into a new company at some point in the next three years.

Why buy Glaxo today?

At about 1,560p, the GSK share price is well below its five-year high of 1,700p+. The planned break-up should leave shareholders with a more tightly focused pharmaceutical business, with much lower levels of debt.  

The shares currently trade on about 13.5 times 2019 forecast earnings,with a 5.1% dividend yield. I believe the stock could deliver strong returns from this level as the group’s transformation plays out over the next few years. In my opinion, this could be a good time to buy.

Good company, wrong price?

One business I’ve rated highly for a number of years is FTSE 250 meat producer Cranswick (LSE: CWK). Back in October I said that I thought the shares looked expensive, based on forecasts for modest earnings growth.

News released on Thursday seemed to justify my caution. The firm warned that profit margins were likely to fall next year, due to the cost of building a new poultry factory and “a potentially challenging commercial landscape”.

Before this news was released, analysts were expecting the group’s earnings to rise by about 5% in 2019/20. My reading of this new guidance is that profits are more likely to be flat next year.

Cranswick’s share price fell by 13% on Thursday, as investors priced in the risk of slowing growth. However, the shares are still trading on around 17 times 2019 forecast earnings, with a 2% dividend yield.

I view this as a good, defensive business that could be a long-term holding. But I think the share price is probably still too high, given the weak outlook for growth. For now, I’m going to leave this one on my watch list.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »