The pandemic seems to be on its last legs and the economy is all but fully functional now. Because of this, financial results for FTSE 100 companies have been on the mend. But traces of the pandemic’s impact are still visible for some of them and can be seen in their share prices. One such company caught my attention recently. I think it could make a great buy for my portfolio in November, before its price starts rising again.
Impacted by coronavirus
I am talking about the healthcare company Smith & Nephew (LSE: SN). I think healthcare stocks are good to have in my investment portfolio during economic slowdowns. Demand for such companies’ products and services is relatively resilient at such times. Even then, Smith & Nephew took a bit of a hit last year because of the unique nature of the pandemic slowdown.
To reduce the risk of spreading Covid-19, elective surgeries were postponed, including knee and hip replacements. Smith & Nephew supplies the parts for such replacements and this segment is also its biggest revenue generator, accounting for over 40% of the total. In its trading statement for the third quarter, released yesterday, its revenue for the segment is down by 0.7% from the same quarter last year, even though overall revenues are up by 5.5%.
Smith & Nephew sees a share price decline
Its outlook has been slightly impacted as well. Smith & Nephew now says that it will “deliver at the low end of full year guidance”. Its share price has likely been affected by its somewhat weak performance too. Over the past year, it has declined by 13%. There is a possibility that it may decline even more, considering that the price-to-earnings (P/E) ratio is more than 35 times, as per my estimates. This is quite pricey, considering the average FTSE 100 stock is valued at 20 times its earnings.
Why I like the FTSE 100 stock
So why do I say that I would not miss buying it in November, exactly? That is because one year from now, I think the stock will look far more attractive than it appears to be now. Its performance could improve as life is now almost back to normal. And this is likely to be reflected in its earnings too. At current price levels, increased earnings would mean a lower P/E ratio, potentially making it more affordable.
There is no guarantee that its P/E will ever come down to the FTSE 100 average level. It is a defensive stock that has performed well over time. Based on the information I have, I see no reason to believe it would be any different in the future either. Here, I am reminded of a valuable lesson I learned from buying another healthcare stock, AstraZeneca, some time ago.
AstraZeneca has always been highly priced compared to its earnings. At present, its P/E is 44 times, and that is not even the highest it has seen. Yet, it has been a good stock for me to hold, providing largely steady capital gains over time. I think a similar story could play out for Smith & Nephew. I will buy it this month.
Manika Premsingh owns shares of AstraZeneca. The Motley Fool UK has recommended Smith & Nephew. 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.