For many investors, 2016 was a year of surprises. The Trump election victory and Brexit are perhaps the two most obvious examples, with both results going against expectations and having the potential to cause major changes to the world from a political, economic and social perspective. As such, 2017 may prove to be an uncertain year, which is partly why investing in these two healthcare companies could be a shrewd move.
A strong turnaround play
Although AstraZeneca (LSE: AZN) has recorded declines in its bottom line during recent years, it’s on target to deliver improved financial performance over the medium term. A key reason for this is its financial strength, which has allowed it to invest heavily in its pipeline. While there’s still some way to go in this regard, the company’s outlook is now relatively bright and it’s expected to post rising sales and profitability over the coming years.
The expectation for improved performance could lead to rising investor sentiment in 2017. This could prove to be a markedly different situation to that experienced by the wider market, since the risks posed by a Trump presidency and Brexit may lead to a reduction in investor confidence in the FTSE 100. As such, AstraZeneca could buck a wider trend of share price falls and benefit from its defensive characteristics, since it’s less positively correlated to the economy than is the case for most of its index peers.
With a price-to-earnings (P/E) ratio of 14.5, AstraZeneca offers good value for money. When combined with its improving outlook, this could make it a star buy in 2017.
A consistent performer
With investors likely to adopt a risk-off mentality during 2017 as a result of the high uncertainty the world economy presently faces, consistent performers such as Smith & Nephew (LSE: SN) could gain favour. It has increased its earnings in each of the last five years and is forecast to post a rise in net profit of 8% in the current year. This is higher than the expected growth rate of the wider index and could therefore mark it out as a reliable, high growth stock to buy.
Smith & Nephew’s consistent performance is due to the relatively robust nature of the wound care and orthopaedic industries. While pharmaceutical companies such as AstraZeneca are dependent on the patent cycle for their profitability, Smith & Nephew enjoys a more predictable financial outlook. This should count in its favour and with a beta of 0.7, it offers a less volatile shareholder experience than is the case for most of its healthcare peers.
While a P/E ratio of 17 is hardly cheap, it represents a fair price to pay for what is a high quality company. A relatively low risk balance sheet, sound strategy and favourable trading conditions in terms of an ageing population across the globe mean that 2017 could prove to be a highly successful year for the business and its investors.
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Peter Stephens owns shares of AstraZeneca. The Motley Fool UK has recommended AstraZeneca. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.