The stock market is slowly starting to rebound from the 2022 correction, yet not all FTSE 100 stocks have returned to their former glory.
In some cases, this lack of share price appreciation may be justified. Yet some businesses are making seemingly solid progress despite continued pessimism from investors. And interestingly, a few reside within the healthcare sector.
While AstraZeneca has been elevating the UK’s flagship index to new highs, other healthcare leaders like GSK (LSE:GSK) and Smith & Nephew (LSE:SN) remain relatively unloved. With that in mind, let’s take a closer look at what’s going on under the surface and whether investors could be looking at some lucrative long-term investment opportunities.
The shroud of legal uncertainty
GSK has been through a bit of a tumultuous time of late. After spinning off its consumer healthcare division to become a pharmaceutical pure-play, investors have been questioning the firm’s ability to deliver its promised growth. And the 23% drop in share price over the last 12 months certainly doesn’t hint towards optimism.
However, a closer look at operations reveals what I believe to be highly encouraging progress. New vaccines have made it to market, and the pipeline is lined up with new drug candidates awaiting regulatory approval. Its latest quarterly results revealed a 22% boost in its vaccines segment. And ignoring the contributions from Covid-19-related products, which were always going to be temporary, its speciality medicines divisions have grown by 21%.
Obviously, these figures are nothing to scoff at. So why is this FTSE 100 stock still tumbling? It seems investors are growing increasingly concerned surrounding an ongoing legal battle. The company is currently facing over 3,000 personal injury claims relating to its Zantac drug in the US.
The company vehemently denies the accusations that Zantac causes cancer and has successfully dismissed multiple trials so far. However, litigation like this doesn’t disappear overnight. And if claims turn out to be true, the stock could be in for quite a tumble.
Despite this risk, a P/E ratio of 12.5 looks relatively cheap, suggesting that some of this potential legal downfall is already baked into the valuation. Therefore, I can’t help but think GSK might be a buying opportunity for investors with a stronger stomach for volatility.
Medical devices making a comeback?
Smith & Nephew has faired slightly better than GSK in the past year, with shares rising by just under 8%. That’s probably because management is starting to quash investor concerns regarding its orthopaedics department.
With the pandemic putting elective surgeries on the back burner, demand for knee and hip implants hasn’t been high in the past couple of years. And it doesn’t help that management admitted this segment has been crippled by “poor operational systems and commercial execution”.
But looking at its most recent trading update, things may be starting to turn around. Ignoring the impact of currency effects, orthopaedics revenue is rising again. And guidance indicates a slow but steady rise in revenue growth and profit margins throughout the rest of 2023.
The jury is still out on whether these improving results can be sustained. But it’s an encouraging start for the FTSE 100 stock. And explains why the share price has been on a slow and steady upward trajectory this year.
