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Is GSK’s share price the Footsie bargain of 2018?

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The FTSE 100’s gains in recent months that have pushed it close to record highs may have left many investors feeling as though there are no longer any bargains in the index. While the margins of safety on offer may now be narrower than they were earlier in the year, the reality is that not all stocks are trading on exceptionally high valuations.

One such company is diversified healthcare stock GlaxoSmithKline (LSE: GSK). Its shares have underperformed the wider index by 12% in the last year, declining by 10%. With what seems to be a wide margin of safety, they could be worth buying alongside a high-flying growth stock that reported on Friday.

Risk/reward

Even though stock markets are relatively high at the moment, it could be a prudent move for investors to have a mix of growth and defensive stocks in their portfolios. While the current bull market could continue over the medium term, since the prospects for global economic growth are generally positive, the reality is that a bear market is never all that far away. As such, planning for potential downturns while also seeking to take advantage of possible price rises could be a sound strategy to pursue.

GlaxoSmithKline has historically been seen as a relatively defensive share. Its financial performance has relatively low positive correlation to the rest of the economy, which means that it could deliver impressive earnings growth even if the macroeconomic outlook is downbeat. And with the company having a diverse business model in terms of its exposure to vaccines, pharmaceuticals and consumer healthcare products, its financial future seems to be positive.

Investment potential

GlaxoSmithKline has a dividend yield of around 5.3% at the present time. This is 140 basis points higher than the FTSE 100’s yield, and suggests that the stock could offer good value for money.

Certainly, its dividend growth may be lacking in the near term, with the company focusing on improving its dividend coverage ratio. However, with dividend cover expected to be 1.4 in the next financial year, there could be scope for rising dividends over the medium term.

Furthermore, with the world’s population increasing in size and in terms of its age, demand for healthcare products could increase. In fact, GlaxoSmithKline and its industry peers could provide solid growth opportunities over the next decade. When combined with its defensive qualities, this may provide one of the most enticing investment opportunities in the FTSE 100 at the present time.

Growth outlook

Of course, stock markets could continue to rise, and it may therefore be a good idea for investors to hold growth stocks within their portfolios. One company which has been able to generate high returns for its investors in the last year is fantasy miniatures retailer Games Workshop (LSE: GAW). It released a positive trading update on Friday which showed that it continues to deliver strong growth across all of its sales channels.

The company’s stock price has risen by 155% in the last year, with its high level of operational gearing translating into rising profitability due to higher sales. Its niche has proved to be somewhat defensive during a tough period for the wider UK retail sector, and this situation could continue over the medium term. As a result, it may be able to offer further outperformance of its sector, and of the wider index in future years.

With Games Workshop’s share price having risen significantly over the last year, it is unsurprising that it now trades on a price-to-earnings (P/E) ratio of 23. While high, the company’s growth potential could be impressive. This could mean it is worthy of such a high valuation – especially since it seems to have a sound growth strategy for the long term.

Of course, holding defensive stocks with wider margins of safety is also a sound idea. But with stock markets moving higher, Games Workshop seems to be an enticing growth play.

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Peter Stephens owns shares of GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. 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.