Keen Fool readers will know that I’m a fan of UK pharmaceuticals giant GlaxoSmithKline (LSE: GSK). Of all the FTSE 100 stocks I’ve written about since March, the GlaxoSmithKline share price has been #1 on my mind.
The GSK share price’s fall and rise
I’ve just returned from a three-week UK staycation, during which the GlaxoSmithKline share price has declined persistently. Before I went away, GSK shares closed at nearly 1,612p on 12 August. Last Friday, they finished at 1,430p, down 182p (11.3%) in two-and-a-half weeks. That’s a pretty steep decline for a ‘boring’ value share.
However, GSK shares have staged a big comeback this week. As I write, they trade above 1,532p, which is a 7.1% leap halfway into this week. Here are five reasons why I think this comeback was on the cards and what I’d do now.
1. The share price went too low
At last Friday’s 1,430p, GSK shares stood just 55p above their 2020 low of 1,375p set on on 23 March during the Covid-19 market meltdown. Clearly, some investors decided that the GlaxoSmithKline share price had declined too far. Hence, they piled into the shares, making GSK one of this week’s most-traded UK shares.
2. GSK shares became too cheap
Based on diluted earnings per share of 92.6p in 2019 and last Friday’s share price of 1,430p, GSK trades on a price-to-earnings ratio of 14.4. This is low for GSK shares in historical terms, hence their increased attractiveness to value investors.
3. The dividend yield had soared to 5.6%
For the past five years, GSK shares have paid a yearly dividend of 80p (plus a 20p special dividend for 2015). An 80p cash payout based on Friday’s closing price of 1,430p gives a dividend yield of 5.6%. That’s mouthwatering to value investors, hence the shift from sellers to buyers this week.
4. Tech shares took a tumble
The past few days have seen US tech shares stumble and then tumble. Shares in Apple have dived from nearly $138 to below $113 in a week. Meanwhile, Tesla‘s stock price has crashed by a third, from $500 to $330 in five trading sessions.
With tech shares sliding, a fair few fund managers and individual investors will have retreated from the FAANG bubble to buy value-oriented shares. Of course, a rotation into value shares would likely help to push up the GlaxoSmithKline share price.
5. GSK’s Covid-19 vaccine is progressing
Working with Sanofi, GSK is developing a vaccine against Covid-19. According to the latest news, the trial is going well. This week, GSK’s big rival AstraZeneca temporarily halted its vaccine trial after an adverse reaction. Hence, disappointed investors may well have sold Astra shares to buy into GSK, thus lifting the GSK share price.
To summarise, the GlaxoSmithKline share price has leapt this week, driven by higher share volumes and more investors hitting the ‘Buy’ button. However, I still see GSK shares as offering compelling long-term value, so I would keep buying them today!
