Summer Selection: Tobacco, Pharma Or Retail Stocks?

GlaxoSmithKline plc (LON:GSK), British American Tobacco plc (LON:BATS) and Next plc (LON:NXT) are under the spotlight.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The summer lull is upon us, so the obvious question is: will investors bet on more defensive sectors this summer?

In short, it goes down to fundamentals, rather than seasonality.

Retail, Pharma, Or Tobacco?

Consider GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US), British American Tobacco (LSE: BATS) and Next (LSE: NXT).

Should you invest £1,000 in BT right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BT made the list?

See the 6 stocks

Shares of Glaxo and BAT — two of the largest players in the tobacco and pharmaceutical industries, respectively — have been outperformed by Next’s since mid-June. In fact, the shares of the clothing and home products retailer have outperformed those of BAT by almost three percentage points, and those of Glaxo by about seven percentage points at the time of writing. 

Track record, long-term trends and prospects of growth also suggest that: Glaxo is the laggard, and could be bought on the cheap right now; BAT is a relatively stable business whose stock looks undervalued; and Next may continue to outperform the other two, but only if its growth trajectory beats expectations.

NextNext: A Bit Pricey

Next stock has been looking for direction since the end of the first quarter. It is now close to its record highs.

It’s the riskiest bet, but could certainly yield market-beating returns. Next is a solid retailer. Its fundamentals are strong, and its stock is less volatile than those of smaller high-street competitors. Its valuation, however, is demanding.

With a market cap plus net debt (Enterprise Value, or EV) of 11 times forward earnings, before interest, tax, depreciation and amortisation (EBITDA), Next is not a bargain. It needs growth, and lots of it, to continue its formidable run on the stock market.

Efficiency will likely support growth in earnings per share (EPS); market consensus estimates are for EPS growth at about 10% annually  in the next couple of years. Such a growth rate is well below Next’s trailing performance, which points to possible downside for shareholders. It’s a close call, but I would hold Next as part of a diversified portfolio. 

GlaxoSmithKlineGlaxo: A Bargain?

The ongoing bribery saga in China weighs on Glaxo’s valuation, but I’d argue that bad news is already fully priced into Glaxo stock.

At about 11 times forward EV/EBITDA, Glaxo bears the hallmarks of a company whose valuation has been battered well beyond fair value, particularly if its trading multiples are compared to those of other pharmaceutical companies in the UK. Shire stock trades at 18 times forward EV/EBITDA, while AstraZeneca stock is valued at 12 times forward EV/EBITDA.

Several aspects of these three businesses are different, so a straight comparison based on their trading multiples is by no means the only tool a savvy investors should use. It appears clear, however, that the equity values of Shire and AstraZeneca have rallied on the back of takeover talk, rather than in the wake of significant improvements on the business side. The latest £30bn offer from AbbVie, which was announced on Tuesday,  is particularly unappealing for Shire shareholders. 

For its part, with a market cap of £76bn, Glaxo is much bigger than AstraZeneca (£56bn) and Shire (£27bn), and is an unlikely takeover target. If rumours swirling around AstraZeneca and Shire evaporate, Glaxo stock will outperform its smaller rivals, in my view.

british american tobacco / imperial tobaccoBAT: More Upside Than Downside

BAT stock is up 11% this year. Its trading multiples suggest upside could be between 5% and 10% to the end of 2014.

BAT’s long-term prospects, according to market consensus estimates, suggest limited growth for revenue, although EPS growth is forecast in the region of 8% annually to the end of 2016. With a 4% dividend yield, BAT is a less risky bet in the current environment — although I think Glaxo will really surprise investors.

Should you invest £1,000 in BT right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BT made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alessandro doesn't own shares in any of the companies mentioned. The Motley Fool has recommended shares in GlaxoSmithKline.

More on Investing Articles

Young Black woman looking concerned while in front of her laptop
Investing Articles

Are Tesco shares a screaming buy after sinking to 9-month lows?

Tesco shares continue to experience price weakness as signs of mounting competition grow. But is it now too cheap to…

Read more »

Investing Articles

Down 31%! 1 top growth stock to consider at $10 for a Stocks and Shares ISA

This high-quality stock has pulled back sharply since November, making it a possible candidate for a growth-oriented Stocks and Shares…

Read more »

Long-term vs short-term investing concept on a staircase
Investing Articles

Down 28% in 8 months, is AstraZeneca’s share price too cheap for me to pass up right now?

AstraZeneca’s share price has fallen a long way from its September high, but this may mean an opportunity for me…

Read more »

Investing Articles

Is April a great time to start investing?

Our writer spotlights a top-tier tech stock that has sold off recently, making it worthy of consideration for someone ready…

Read more »

Investing Articles

1 beaten down dividend stock investors could consider for passive income

Our writer Ken Hall takes a look at one under-pressure mining giant that should be on investors' radars as a…

Read more »

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

3 FTSE 100 investment trusts to consider for a new ISA in 2025

It's a new tax year and time to dust off that old ISA. Here are three FTSE 100 investment trusts…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Is there still time to pick up Nvidia stock cheaply?

The Nvidia stock price has just had a scary week. But here's why I expect that should have very little…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Investors considering Legal & General shares could aim for £10,075 a year in passive income from a £5,500 stake!

Legal & General shares deliver one of the highest yields of any major FTSE-listed firm, so investing now could generate…

Read more »