Tracking the FTSE 100 is an option for cautious investors wanting to buy shares in 2021. However, I think I can make better money buying those stocks that have the potential to gain the most from the ongoing market recovery.
Today, I’m looking at two examples from the top tier. As luck would have it, both reported on trading this morning.
Smith & Nephew
FTSE 100 medical technology company Smith & Nephew (LSE: SN) is first up. By contrast to other members of the index, its share price is still far off its pre-Covid-19 highs. Based on the reaction to today’s Q1 statement, I think time could be running out to acquire this company at a good price.
At $1.13bn, revenue over the three months to 3 April came in 11.5% higher on a reported basis compared to the same period last year. While some of this is the result of currency tailwinds and input from acquisitions, CEO Roland Diggelmann reflected that surgery volumes were “moving towards more normal levels in many markets.“
Importantly, all three of S&N’s franchises (Orthopaedics, Sports Medicine & ENT and Advanced Wound Management) have bounced back to growth. Tellingly, a strong rebound in revenue in the Chinese market gives some indication of how business in developed markets might perform once Covid-19 is defeated.
Interestingly, S&N chose not to alter its 2021 guidance on revenue growth and profit margin today. I think this is prudent. After all, operations and treatments could still be impacted by a significant third wave in 2021, highlighting that no FTSE 100 stock is devoid of risk
With talk of “improving visibility” however, I’m tempted to believe we could begin to see the S&N share price really recover from here as postponed elective surgeries get the green light. A price-to-earnings (P/E) ratio of 24 looks punchy, but not after the potential growth is factored in. I’m sorely tempted to pile in.
To label gambling firm Flutter Entertainment (LSE: FLTR) a recovery play may sound strange. After all, its share price has already climbed 65% over the last year.
However, like S&N, I’m inclined to think we could see more gains ahead, especially once the sporting calendar gets back to normal and retail betting outlets and stadiums are allowed to reopen.
Again, like S&N, today’s Q1 trading update made for very pleasant reading. Total revenue rose 32% to £1.49bn over the first three months of 2021. Unsurprisingly, the vast majority of this was online where player growth of 36% was also recorded.
Unlike its FTSE 100 peer, however, this news hasn’t been quite so well received. To me, this suggests that a lot of positivity was already priced in. After all, the betting operator’s shares were already changing hands for 50 times earnings.
A predicted rise in UK coronavirus infection rates may have brought forth some profit-taking. Investors may also speculate that people will be less inclined to place bets if they’re concerned about where levels of employment might be going once the full economic cost of the pandemic is realised.
That said, I think I’d be tempted to buy some Flutter today and add in bouts on any weakness. The growth opportunities, particularly in the US, are hard to ignore. Moreover, a price/earnings-to-growth (PEG) ratio of 1.4 isn’t excessive. Anything below 1.0 tends to be indicative of good value.