In another article today, I talked about a FTSE 100 stock that pleasantly surprised me with its performance in 2021. The stock was the multi-commodity miner and marketer Glencore. But where there are pleasant surprises, there are nasty ones too, as in the case of the healthcare stock Smith & Nephew (LSE: SN). This has been particularly hard-hit by the pandemic. Data from Interactive Investor show the stock was among the 10 worst FTSE 100 performers in 2021 as of last week. It is down by almost 20% this year!
Why Smith & Nephew has fallen in 2021
If I had not been following the stock for a while, I would have been even more disappointed than I am now. Typically, healthcare stocks do relatively well in a slowdown, because they are defensives. These are stocks whose demand changes relatively little whether we are in boom or bust phases of the business cycle. But last year’s slowdown was no ordinary one. It actually had us spending as little time outdoors as possible, and that included going to hospitals.
As it happens, Smith & Nephew’s key revenue source is from the supply of parts required for knee and hip replacement surgeries. And these are more likely to be elective than not. So these were postponed last year and for much of this year too. As a result, the company is not particularly optimistic about its near-term prospects.
Better days ahead?
Yet I think there could be significant upside to the stock in 2022. If the recovery picks up pace and Covid-19 recedes significantly from here, there is no reason why demand for the company’s major products would not rise. In fact, I suspect it could rise even more than it normally would because there will be pent-up demand for such surgeries. This in turn could lift its stock price, which is languishing way below its pre-pandemic levels. That its share price is down is a good sign too, in my opinion. This is because it shows plenty of potential upside.
And I am not the only one who believes so. According to analysts’ forecasts compiled by the Financial Times, even the most pessimistic forecasters expect the stock to rise by 9% in the next 12 months. On average, the expectation is for a 23% increase, which is pretty good if you ask me. Of course all forecasts are subject to revision, if the environment surrounding the stock changes. And at this time more than at other times, there is a lot of uncertainty in the air.
My assessment
It is entirely possible that Covid-19 drags on for yet another year. And even if it does not, the recovery could continue to be weak, pushing elective surgeries even further down the road. But that does not seem very likely. And for that reason, I continue to be bullish on this FTSE 100 stock. In fact, I think I will buy it soon.
