The stock market crash in the first quarter of 2020 was both steep and dramatic. The FTSE 100 index plunged by a third, crashing by more than 2,600 points to close below 5,000 on 23 March. Thus, the coronavirus crisis provided UK investors with amazing opportunities to snap up cheap shares at unbelievable prices. Some of the UK’s worst-hit stocks have since gone on to double, triple, or go even higher since the March meltdown.
Cheap shares can keep getting cheaper
As I write, the FTSE 100 hovers around 5,780 points, up almost a sixth (15.8%) from its 23 March low. So, this healthy bounceback means that there are no decent cheap shares left to buy, right? Wrong, because some quality shares have, for reasons best known to the market, fallen back to reach (or even breach) their March lows.
As a value investor, I often see markets behaving irrationally by repeatedly marking down the value of great businesses until they enter the category of cheap shares. Furthermore, shares that become bargains frequently get cheaper, even to the point that they become crazily mispriced. That’s all part and parcel of market momentum.
This FTSE 100 stock has crashed since mid-May
Habitual Fool readers will know that I have a long-term shareholding in pharmaceutical giant GlaxoSmithKline (LSE: GSK). Indeed, I’ve been an admirer of this business since the late Eighties, when it was just Glaxo.
As a global healthcare business, GSK’s mission is “to research, develop and manufacture innovative pharmaceutical medicines, vaccines and consumer healthcare products“. It spent £4.3bn on R&D in 2019 and currently has 35 new medicines and 15 new vaccines in development. What’s more, it has world-leading franchises in immunology/oncology (cancer), HIV/AIDS, and respiratory treatments.
For me, as a world leader in certain key fields, GSK is a genuine British success story. However, the wider market profoundly disagrees with my views, because GSK shares have been cheap for a while. And their price keeps tumbling!
For me, GSK has become a beautiful bargain buy
I won’t (and don’t) buy just any old cheap shares. My aim is to buy into great businesses as and when attractive entry points come along. With GSK, I believe now is surely a great time to buy big. That’s because as well as being priced to sell, GSK stock is what I call an ‘SLR share’. This means that it offers ‘Safety, Liquidity, and Returns’ that are simply too tempting to turn down.
As I write, GSK shares trade around 1,335.3p, valuing this FTSE 100 champion at £68bn. Yet they soared to 1,742.2p on 13 May, in the powerful relief rally following March’s low. Hence, they have fallen more than £3 (23%) in just over five months.
This morning, GSK’s stock dipped below its March low to touch 1,324.4p, which seems bizarre to me. Today, they absolutely qualify as cheap shares, given that they trade on a price-to-earnings ratio of 10.2, for an earnings yield of 9.8%. In addition, for the past five years, GSK has paid a yearly cash dividend of 80p a share. That’s a current dividend yield of 6%, easily covered 1.64 times by earnings.
To sum up, in today’s ultra-low-rate world, I’d be mad to turn down a steady 6% yearly cash return from a solid, growing business. That’s why I would buy these cheap shares today, preferably in an ISA, so that I can bank a juicy tax-free passive income and future capital gains to retire rich!
