With the US ‘default deadline’ set at 17 October, GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) looks to be the perfect stock to buy because it has superb defensive qualities.
Indeed, should things not be resolved in the US, I want to be invested in stocks that are likely to fall less than the market does (assuming the market falls, of course). So, top of my ‘buy list’ is GlaxoSmithKline.
One way to assess the amount of any share price fall is through a stock’s beta, with a beta of less than 1 suggesting that a market fall will be more severe than a stock’s fall. GlaxoSmithKline’s beta of 0.75 fits the bill perfectly and means that, should this be the start of a bearish period for shares, I should be better protected on the downside than had I been invested in the general market.
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Of course, superb defensive qualities are not the only reason why I’m bullish on GlaxoSmithKline.
Indeed, the company’s ability to deliver high and consistent return on equity is highly relevant and shows that the business is capable of generating excellent returns for its shareholders.
In the last year, for instance, return on equity was an extremely high 70%. Furthermore, this figure has been above 50% in four of the last five years, with 2010 being the one blot on the company’s report. However, even in 2010 (when a £4 billion payment for legal disputes hit profit hard) return on equity was still relatively impressive, being 19%.
In addition, I believe that buying shares in GlaxoSmithKline at this moment in time would mean getting ahead of the curve. Negative news flow surrounding the alleged bribery investigation in China has weighed on shares, but this is unlikely to last in the long run.
Furthermore, I feel it will just be a matter of time before the market once again focuses on the success the company is having with its drug pipeline and the approvals process. This, rather than the outcome of a Chinese bribery investigation, is likely to be a long-term driver of the share price.
So, I’m keen on the idea of adding to my position in GlaxoSmithKline because of its excellent defensive qualities, as represented by its low beta. I’m also impressed by its high — and consistent — return on equity as well as the feeling that I would be getting ahead of the curve, were I to buy shares now.
