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Are AstraZeneca plc & GlaxoSmithKline plc A Sound Investment Right Now?

“You don’t want to be a stock broker these days my friend”, a senior cash equity trader told me this week. Why so? 

The FTSE 100 has been under pressure as investors contemplate what the consequences of a Yes vote in Scotland might be on September 18. “Opportunity or threat?” is the recurring question. On top of that, China came again under the spotlight on Monday as it struggles to grow its economy. Moreover, traders around the globe need direction from the Federal Reserve later this week. 

UK Pharma Stocks

The valuations of most pharma stocks are out of whack with reality, true. But the shockwaves are being felt in other sectors — look at the shares of ARM, Associated British Foods and ASOS, to name a few. That, is turn, should boost the appeal of the pharmaceutical space. Easy, right?

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You may be safe if you invest in the pharma space now with a three-month investment horizon, although it must be noted that the shares of AstraZeneca (LSE: AZN) and Hikma Pharmaceuticals (LSE: HIK) — as well as those of a medical devices maker such as Smith & Nephew (LSE: SN)are seriously expensive. The outlier is GlaxoSmithKline (LSE: GSK), in my view.

Looking For A Truly Defensive Play? 

AstraZeneca stock has been trading above fair value for some time. It has risen by more than 10% in the last month alone, and its main attraction is that Astra is still considered a takeover target for Pfizer. The shares have recorded a performance of +27% in 2014. Astra’s trading multiples suggest plenty of possible downside, but more volatile market conditions may provide a support to the stock. Astra’s yield is truly appealing — other metrics less so. 

Glaxo, for its part, is between a rock and a hard place. Glaxo stock has performed relatively well in the last few weeks, but it appears evident that investors aren’t convinced about the company’s prospects. The bribery scandal in China is a big unsolved problem, too. Nevertheless, I believe Glaxo is a sound bet for value investors. Very possibly, this is the best play in the sector.

Elsewhere, Hikma has recently come under the spotlight because it may attract interest from third parties. Its stock, however, looks fully valued at this level. It has risen by 37% year to date, but has lost 6% of value in the last four weeks of trading. I don’t think Hikma is a great opportunity right now. 

On the face of it, the same applies to Smith & Nephew, whose shareholders have been long waiting for an offer to materialise. They have enjoyed significant upside from takeover speculations, which are clearly priced into the shares. S&N is a solid business operating in a sector where consolidation is on the cards. Its shares trade at 12.7x and 11x adjusted operating cash flow for 2014 and 2015, respectively. These trading multiples are not incredibly attractive, but is S&N a buy in this environment?

“You know, other options are thin on the ground…” my source reminded me. 

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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. The Motley Fool UK owns shares of Smith & Nephew. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.