One of my favourite FTSE 100 stocks is down 42%. But it’s now making a rapid recovery

This FTSE 100 stock was absolutely crushed in the pandemic. But it now appears to be in the early stages of an uptrend.

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Medical technology company Smith & Nephew‘s (LSE: SN.) one of my favourite FTSE 100 stocks. Currently, it’s the fourth largest individual Footsie holding in my entire investment portfolio.

This stock was hammered during the coronavirus pandemic and it’s still down 42% from its highs. But the good news is that it now appears to be making a fast recovery.

A new uptrend

In late October 2023, Smith & Nephew’s share price hit a 10-year low of 887p. I’m convinced that that was the bottom for the healthcare stock.

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Since then, the share price has been quietly starting a new uptrend. Currently, the stock’s above both its 50-day and 200-day moving averages (these are technical indicators that can be used to identify share price trends). And recently, it experienced a ‘golden cross’ – a pattern that indicates a stock’s turned a corner into a bullish phase.

Created with Highcharts 11.4.3Smith & Nephew Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Improving performance

It’s not hard to see why the stock’s rising again. Recently, results have shown the company – which specialises in joint replacement technology – is recovering from Covid disruption, and that its transformation plan (announced in 2022) is working.

For example, half-year results posted in early August showed a 5.6% increase in revenue. Meanwhile, trading profit came in at $471m, up 12.8% year on year and ahead of analysts’ forecast.

Encouragingly, CEO Deepak Nath said that there’s scope for further progress: “There is still more work to be done and we expect to see further progress in the second half of the year.”

Still cheap

Looking at today’s valuation, I see plenty of room for further share price gains. Currently, analysts expect Smith & Nephew to generate earnings per share of 110 cents next year. So at today’s share price, the forward-looking price-to-earnings (P/E ratio) here is about 13.9.

That’s relatively low for a high-quality healthcare business. If the company was able to show that it’s firing on all cylinders, I wouldn’t be surprised to see the P/E ratio rise to somewhere between 18 and 20 (meaning the shares could potentially rise up to 44% from here).

It’s worth noting that back in July, activist investor Cevian Capital disclosed a 5% stake in the company. So it clearly sees value in the stock.

At the time, the firm – which is known for taking stakes in businesses and calling for change – said it saw the potential to create ”significant long-term value” by improving the operating performance of the medical technology company.

I’m bullish

Now, there’s no guarantee the shares will keep rising from here, of course. This company operates in a competitive industry, and it’s up against some formidable rivals.

Another risk is GLP-1 weight-loss drugs. These could have an impact on the dynamics of the joint replacement industry (less body weight, less pressure on joints).

All things considered however, I’m bullish on this stock. With the world’s ageing population likely to boost the joint replacement market in the years ahead, I see a lot of investment appeal.

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has positions in Smith & Nephew Plc. The Motley Fool UK has recommended Smith & Nephew Plc. 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.

Like buying £1 for 51p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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