Investing in high-quality FTSE 100 companies when their share prices are down is a strategy that can pay off. Usually, high-quality stocks recover after share price weakness, delivering big gains for investors who bought in at low prices.
Here, I’m going to highlight three high-quality Footsie stocks that have tanked over the last six months. I believe all three shares have the potential to stage powerful rebounds at some stage in the not-too-distant future.
Weight-loss drug fears
First up is healthcare company Smith & Nephew (LSE: SN.).
Like a lot of medical device companies, it has tanked recently amid fears that GLP-1 weight-loss drugs such as Wegovy and Ozempic are going to reduce demand for healthcare procedures. Over the last six months, it has fallen about 21%.
Now, while there’s definitely some uncertainty around the impact of weight-loss drugs, I expect this stock to rebound at some stage.
At present, it’s trading on a forward-looking P/E ratio of just 11.6, which seems too low for a company that a) should be able to generate solid growth in the years ahead on the back of the world’s ageing population and b) has paid a dividend every year since 1937.
It’s worth noting that Smith & Nephew’s Relative Strength Index or ‘RSI’ (a measure of whether a stock is overbought or oversold) is currently below 30. This indicates that the stock is extremely oversold right now.
Of course, there’s no guarantee that the stock will rebound in the near term. Eventually though, investors should see the value on offer here.
Next, we have insurance company Prudential (LSE: PRU).
It’s down significantly this year on the back of concerns over economic conditions in China and other Asian markets (the insurer is focused predominantly on Asia and Africa today). Over the last six months, it has fallen about 22%.
While China is really struggling at the moment (and may continue to struggle for a while), I expect the world’s second-largest economy to recover at some stage. And when it does, Prudential’s earnings, and share price, should get a boost.
Looking ahead, the company’s long-term growth remains huge. Across Asia and Africa, large proportions of the population are in need of savings and insurance products.
And what’s encouraging is that many brokers have share price targets for Prudential that are above the 1,500p mark. This implies that they see share price gains of 50% or more here.
Luxury spending downturn
Finally, there’s luxury goods company Burberry (LSE: BRBY).
Like many other luxury goods stocks (LVMH, Richemont, etc.), it has tanked recently on the back of lower demand for luxury products (a lot of this is related to China as the country accounts for around 20% of global luxury goods spending). Over the last six months, it has fallen about 32%.
I expect a recovery at some point. This is a high-quality company with a strong brand, a growing top line, a robust balance sheet, and a high level of profitability. And right now, it looks cheap (the forward-looking P/E ratio is only about 15).
Of course, if economic conditions continue to deteriorate, the stock could come under more pressure.
Taking a longer-term view, however, I think the share price is likely to move higher.