Buying recovery stocks can be hugely profitable. However, they can also be exceptionally volatile and risky, which is why it is sometimes important to bank profits when they are on offer. That’s what I did recently with support services company Mitie (LSE: MTO). It has recovered to a large extent during the course of 2017, but now could face a highly uncertain future while lacking a sufficiently wide margin of safety. As such, a more stable stock such as GlaxoSmithKline (LSE: GSK) may be a better option for the long term.
Uncertain outlook
Mitie released news on Tuesday. It stated that the company was informed on 25 August that the FCA has commenced an investigation into the company. It is connected to the timeliness of a profit warning announced by the company on 19 September 2016, as well as the manner of preparation and content of the company’s financial information, position and results for the period ending 31 March 2016. Mitie does not expect to update the market on the progress of the investigation until it is completed, and is cooperating fully with the FCA.
Although the company’s share price did not fall following the news, it nevertheless creates further uncertainty regarding its future. It has a new management team and a new strategy which have already made its outlook more difficult to predict. With the FCA investigation having the potential to deliver more difficult news flow over the medium term, it could lead to investors demanding a wider margin of safety. This may translate into relatively disappointing share price performance in future.
An improving business
While Mitie’s new strategy could deliver strong earnings growth, it seems to lack the mix of stability and upside potential of other stocks such as GlaxoSmithKline. The latter offers a diversified business model, since it operates in consumer goods, pharmaceuticals and vaccines. This reduces its overall risk profile and provides a degree of stability which is not always present among pureplay pharmaceutical stocks which are reliant on the boom/bust patent cycle.
As well as its stability, GlaxoSmithKline also has strong growth potential. It has an excellent pipeline of potential treatments which could catalyse its earnings performance in future years. It also has exposure to emerging markets through its consumer goods arm, where demand for a range of consumer products is forecast to increase in future years.
With GlaxoSmithKline trading on a price-to-earnings (P/E) ratio of 13.5, it seems to offer excellent value for money given its risk/reward profile. In fact, its rating is lower than that of Mitie, which now has a P/E of 15.2 after its recent share price gain. Due to it having a lower valuation, more robust business model and significant growth potential in the long run, GlaxoSmithKline seems to be a stronger investment opportunity than Mitie at the present time.
