The FTSE 100 has been on relative fire in recent weeks, making April’s sell-off feel like a distant memory. Yesterday, it passed the 9,000 boundary for the first time, leaving the index up 9% year-to-date and outpacing the S&P 500. It has dipped back just under 9,000 since though.
We can speculate on the reasons for this great performance but the desire of some investors to diversify away from the US on fears surrounding the health of its economy is likely high up the list.
However, this fine run of form belies the fact that some Footsie members are still trading at dirt cheap valuations.
Bargain price
Shares in pharmaceutical giant GSK (LSE: GSK) currently change hands at a price-to-earnings (P/E) ratio of a little less than nine. That’s low compared to the wider UK market. It’s also significantly down from the company’s average P/E over the last five years (15).
At least some of this is probably due to concerns over the Trump administration’s threat to slap tariffs on imported medicines. Health secretary Robert F Kennedy is also a vocal critic of vaccines — GSK’s bread and butter.
Another reason is its pretty woeful track record. If I’d put £10,000 to work in the stock five years ago, my stake would only be worth around £8,600 today. Yes, dividends would have dulled the pain a bit. But it’s still deeply unsatisfactory when other members of the index have delivered far better returns.
On a positive note…
There are, however, a few things to say in GSK’s favour, aside from the cheap as chips price tag.
While the execution risk remains substantial, the company’s pipeline of new treatments, and use of existing products in different markets, could usher in a new phase of growth. An application to expand the use of its RSV (respiratory syncytial virus) vaccine Arexvy to adults aged 18-49, for example, was recently submitted to the FDA.
Second, the forecast dividend yield of 4.6% is higher than the average across the UK’s top tier (3.3%). It should be easily covered by profit too, assuming analysts aren’t wide of the mark in their calculations.
As simplistic as it sounds, it’s worth remembering that Trump will eventually vacate the White House. While we can’t predict the policies of the next US President with any certainty, I reckon there’s a good chance that s/he won’t be quite as combative.
On top of this, there’s very little interest in GSK from short sellers — those betting a company’s share price has further to fall. A spate of director buying in June bodes well too, even if some of the amounts were fairly modest.
Defensive option
It’s quite possible that the positive momentum we’re seeing in the FTSE 100 could be about to slow or even reverse, especially if any fresh announcements from Chancellor Rachel Reeves prove unpopular with the City. News that UK inflation climbed to 3.6% in June may also give investors pause for thought.
In such a situation, more defensive stocks could have their time in the sun. And in spite of the aforementioned headwinds, there aren’t many sectors more defensive than the one occupied by GSK.
All told, I think it’s worth considering, especially by those with a desire to tilt their portfolios towards value and income.
