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Why I might buy Smith & Nephew shares after a 6% price surge

Buy what you know,” goes the old investing mantra. And I think I know Smith & Nephew (LSE: SN), which makes surgical implants, reasonably well. I’ve worked in that business in the past, and I know how widely used and well regarded are its products — they really are among the best.

I’m currently eyeing up possibilities for my next SIPP investment, and the 6% share price spike at Smith & Nephew on Thursday drew my attention. It’s a response to the latest trading update, which reported a 3% rise in third-quarter underlying revenue.

Chief executive Namal Nawana cited US and Emerging Markets growth as driving the overall improvement, with underlying US revenue up 4% and Emerging Markets revenue surging by 10%.

That sounds like really good news, as uncertain US markets have been contributing to the company’s share price volatility all year.

New markets

The firm also reported “strong growth in Reconstruction, Sports Medicine Joint Repair and Advanced Wound Devices,” which are potentially lucrative markets.

Smith & Nephew does appear to be doing well at refocusing the way it does business, with Nawana adding: “These results were achieved while successfully redesigning how we will run the company. There is still more to do, and I am pleased with the pace of progress and engagement across the organisation.”

Smith & Nephew’s dividend yields aren’t great, with forecasts a little above the 2% mark. But they should be well covered by earnings and are progressive — and a sustainable and rising divided can be better than a big yield today.

I want to see how well the new strategy progresses, but Smith & Nephew is definitely on my shortlist.

Growth share dip

I’ve also had my eye on NMC Health (LSE: NMC) for some time, though the share price chart has started to look scarily like some of the growth bubbles we’ve seen in the past few years. And I’ve been fearing it might go pop.

But from a peak of 4,376p in August, the price has shed 20% to drop to 3,508p as I write, so are we looking at an unexpected buying opportunity? 

First-half figures in August were impressive, but actually proved to be pivotal for the share price, which went into a two-month slide. Were investors hoping for even better results? It’s hard to tell, but it’s quite common for growth investors to be expecting spectacular results when all they actually get is seriously good ones — and they’ll often run for the hills when that happens.

Upgraded guidance

But NMC revised its guidance upwards a week ago, and that could well have given fresh life to the share price and we’re seeing it moving upwards again. After a strong first half, the firm now expects a 24% rise in revenue for the full year, and has lifted EBITDA guidance from $465m to $480m.

The shares are currently priced at 25 times forecast 2019 earnings per share, which definitely requires solid growth to justify. But predictions suggest 30% EPS rises this year and next, and we’re looking at an attractive PEG ratio of only 0.8.

I still see NMC as a strong growth candidate, with a likelihood of turning into a big-dividend cash cow in the future.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended NMC Health. 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.