I think GlaxoSmithKline (LSE: GSK) shares are currently one of the most undervalued investments in the FTSE 100. And combined in a portfolio with Smiths Group (LSE: SMIN), I think they could help one build a sizeable financial nest egg.
GlaxoSmithKline shares on offer
Despite the company’s defensive qualities, shares in pharmaceutical giant GlaxoSmithKline haven’t escaped this year’s market turbulence. The stock has fallen a staggering 28% since the beginning of the year. I think this would make sense if group earnings were expected to decline substantially in 2020. But that’s not the case.
Analysts are expecting the company to report a 14% decline in earnings for the year and then deliver a modest rebound in 2021.
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As the stock has fallen, the valuation of GlaxoSmithKline’s shares has become more attractive. The stock is currently changing hands at a forward price-to-earnings (P/E) multiple of just 11.7, compared to the long-term average of around 15. Also, the stock currently supports a dividend yield of 5.8%, which looks extremely attractive in the current interest rate environment.
As such, I think GlaxoSmithKline shares offer a wide margin of safety at current levels. The stock’s valuation also suggests it could produce large total returns for investors in the years ahead as economic uncertainty begins to recede.
FTSE 100 healthcare champion
As well as Glaxo, I’m also interested in Smiths. These two companies operate in the same sector, but they do very different things. Glaxo is mainly focused on pharmaceutical products, while Smiths is more of an engineer, supplying items such as hip replacements and equipment for hospitals. The group also provides solutions for the defence, aerospace and security markets.
Many of the company’s products are highly specialist, which means few competitors can provide the same level of service and quality. That gives the FTSE 100 business an edge. It has also helped the business maintain its growth trajectory in 2020, a year when many industrial corporations have seen significant disruption. Indeed, City analysts are expecting the group to report £292m of net profit this year, up from £265m in the last financial year.
Thanks to this growth, I think it could be worth considering Smiths for one’s portfolio alongside GlaxoSmithKline shares. As well as this potential growth, the stock also supports a dividend yield of 3.1%. Once again, this distribution looks attractive, considering the current interest rate environment.
With the outlook for the global economy currently highly uncertain, defensive companies such as Glaxo and Smiths could be the best investments to own for the foreseeable future. I reckon they have the potential to provide investors with steady, predictable returns in uncertain times.
What’s more, healthcare spending around the world is only growing. Demand may have hit a speed bump in the coronavirus crisis, but patients can’t put off treatment forever.
Therefore, these businesses may see increased demand for their products and services in the years ahead. With that in mind, I think now could be an excellent time to buy these businesses at a discount.
