There’s no doubt about it: investors have had a torrid time of late, with the FTSE 100 slipping from breaching new highs in April, only to sink below the psychologically important sub-6,000 mark on a number of occasions during August and September.
Whilst several sectors have suffered owing to weakness in the price of oil and several other commodities, it has also been notable that several large companies in the Healthcare sector have also been out of favour.
What goes down…
… must go up – at least that would be the expectation of some contrarian investors. However, that has not been the case to date, at least for shares in mega-caps GlaxoSmithKline (LSE: GSK) and AstraZeneca (LSE: AZN), as some investors have taken flight on short-term fears that both business are losing market share in the United States and Europe, coupled with fears about Hillary Clinton’s plans to cap drug prices in the US to prevent so-called “price-gouging”, should she become president.
Additionally, some fund managers have voiced concerns that the dividend is under threat. Brokers are currently forecasting that the full-year payout from GlaxoSmithKline (expected to be at least 80p) will not be fully covered by earnings this year, whilst AstraZeneca seems manageable at around 1.5 times cover.
While one could argue that both management teams should focus on reducing debt, investors should also note that these are two quality businesses that should be able to weather almost anything the market throws at them, and whilst I don’t think that they’ll shoot the lights out in terms of growth, I do think prospective investors could benefit over the long term.
Going for growth and income
So, why have I shunned these wonderfully liquid FTSE big boys? Well, the answer is rather straightforward. I like growth companies and growing income – you could say having my cake and eating it!
And that is what we have got (so far at least) with Bioventix (LSE: BVXP) and Tristel (LSE: TSTL). With sub-£100m market caps, these are on the small side, tightly held and, should things not go to plan, be rather difficult to sell… consider yourself warned!
That said, these companies occupy the number 1 and 3 spot in my portfolio, and I think that both management teams can continue to grow the businesses for many years to come.
Looking at Bioventix, the company is engaged in the development and supply of antibodies: a biotechnology company specialising in the development of high-affinity (very accurate) sheep monoclonal antibodies (SMAs) for use in immunodiagnostics.
The company recently released strong, expectation-beating results. Revenue increased by 23% whilst profit increased by 39% — management topped that off with a 50% rise in the final dividend and promised a similar increase in next year’s interim dividend given the good earnings visibility going forward. It is rare to see these sort of numbers from FTSE 100 firms these days.
Management (which owns a significant chunk of the company) also updated the market on the prospects regarding a potentially transformational test, following a partnership with a large multinational diagnostics company on a project that tests for troponin levels, which are elevated following a heart attack. Bioventix says that it is optimistic that the project is nearing the point of commercialisation if the partner company can receive marketing approval in Europe and the US.
Not to be outdone, Tristel — a company engaged in the manufacturing of infection control, contamination control and hygiene products — released its own set of expectation-beating results. Revenues increased by 14%, pre-tax profits rose by 44% and the final dividend was raised by a stonking 69%! No small act, especially given that the company also paid a 3p per share special dividend in August of this year.
Added to the mix was an extremely bullish chairman (who owns over 20% of the company), who seemed very confident of growth internationally and announced that the company was seeking regulatory approval to sell its products into the United States. If approved, the potential sales could almost double earnings per share going forward.
As we can see from the chart below, the market has been rather impressed with the results, driving the share price to new highs, whilst Astra and Glaxo have underperformed a rather weak FTSE 100.
The Foolish Bottom Line
Whilst it is always pleasing to see smaller companies outperform the wider market, both in growing earnings and the dividend (especially when they form part of your portfolio), investors should remember to tread carefully and not put all of their ‘eggs in one basket’.
Not many companies grow in a straight line and it pays to diversify, especially if you are reliant on the income.
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Dave Sullivan owns shares in Bioventix and Tristel. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.