When it comes to selecting FTSE 100 shares, I’m keen on several of the smallest companies in the index.
For example, Hikma Pharmaceuticals (LSE: HIK) has a market capitalisation of just over £5bn. And that’s small compared to mega-caps like AstraZeneca with its almost-£94bn valuation.
Hikma makes its living producing generic, branded and injectable medicines. And the business has been growing because of the strong demand for the company’s offering. In February, chief executive Siggi Olafsson pointed out that Hikma played a “critical” role in the pandemic. The firm supplied essential medicines for treating Covid-19 patients. And it also continued to provide medicines for patients’ every-day needs.
There’s an ongoing programme of new product launches and partnership agreements helping to drive future sales. The outlook is positive and Olafson expects further growth ahead. However, with the share price near 2,225p the forward-looking earnings multiple is around 15 for 2022, which looks fair rather than cheap. And if forward earnings slip, we could see the valuation contract causing a loss of invested capital as the share price moves lower. But despite that risk, I’m keen to own some of the shares.
Property portal operator Rightmove (LSE: RMV) has a market capitalisation of just above £5bn. I like the company because it has a strong position in the UK property market. Most estate agents and property sellers will list their offerings on the site and it’s the first port of call for many buyers these days.
In February, the firm reported lower earnings and revenues because of the pandemic. And the directors acknowledged further short-term uncertainty ahead. But the outlook beyond the pandemic is positive.
However, the attractions of the stock have driven up the valuation. And I reckon there’s a significant risk of volatility in the share price if earnings don’t hit expectations. City analysts have pencilled in an earnings uplift of almost 12% in 2022. But with the share price near 593p, the forward-looking earnings multiple for that year is around 26. I think that looks expensive. So I’d watch the stock for now with a view to buying later if the valuation drops.
Packaging company DS Smith (LSE: SMDS) operates in a sector with defensive characteristics. With the share price at 405p, the market capitalisation is near £5.5bn. And in early March, the company reported decent trading and a positive outlook for both its European and American operations.
The business is benefitting from the growth of e-commerce and fast-moving consumer goods. And it’s hard for me to imagine weakness ahead for those industries in today’s world. City analysts expect earnings to advance by around 24% in the trading year to April 2022. Meanwhile, the forward-looking earnings multiple is just below 14. And the anticipated dividend yield is around 3.5%.
I think that valuation looks fair rather than cheap. But the shares could decline if those forward estimates are missed. And one possible threat is that Smith isn’t the only player in the packaging sector, so competition could bite into future profits.
Despite the risks, I’d focus on the positives with these three and aim to buy their share on dips, down-days and market reversals. Then I’d hold for the long term, aiming for capital and income growth from my investments.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended DS Smith, Hikma Pharmaceuticals, and Rightmove. 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.