I love buying stocks on bad news, so when I logged on this Monday to find the GSK (LSE: GSK) share price had fallen 9.53%, I snapped up its shares right away.
It’s a policy of mine to average down on portfolio holdings when bad news strikes. The only times I didn’t do that last year – with Glencore and Unilever – I was soon kicking myself as they recovered.
I was so keen to avoid a repeat that I filled my boots without discovering why GSK had slumped. In my defence, it was Monday. I was busy. The stock was trading at a 10% discount to Friday. Seriously, what could go wrong?
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FTSE 100 bargain?
I’m not always so rash with my money. And I won’t be again. When I found out what triggered the crash, I had second thoughts but then it was too late
GSK’s value fell by £7bn after a Delaware judge gave the go-ahead to 70,000 lawsuits alleging that its discontinued heartburn drug Zantac caused cancer. The group immediately said it would appeal, arguing there is “no consistent or reliable evidence” to suggest cancer risk.
This was a real shock. One week earlier, a jury in Illinois has ruled in favour of GSK in the first Zantac case to go to trial. Worse, JP Morgan said the potential liability could top the $2bn to $3bn figure previously assumed by the market. The only positive is that a defeat would probably end in a settlement rather than 70,000 individual claims, which would be off the chart, compensation-wise.
Either way, the uncertainty extends a tough decade for GSK, formerly GlaxoSmithKline, which is still battling to replenish its drugs pipeline. Its once mighty dividend was frozen at 80p per share for years, then cut to 44p in 2022, then 42p in 2023.
Even hiving off its consumer healthcare division, Haleon hasn’t shifted the dial. Now it’s going to fall even further behind all-conquering FTSE 100 rival AstraZeneca.
Bargain stock opportunity
Yet I bought more shares in the company without asking what was up? Thankfully, the shares didn’t fall any further on Monday. In fact, they jumped 1.06% on Tuesday and 2.16% on Wednesday. Sheer dumb luck on my part. I could sell Monday’s purchase at a tiny profit, after stamp duty and charges.
I won’t do that, though. GSK shares look decent value trading at 11.7 times forecast earnings. They’re up 18.09% over the last year, despite this week’s volatility.
The yield isn’t great at 3.76%, roughly in line with the FTSE 100 average, but it’s okay. I don’t have any other direct exposure to the healthcare sector, and I don’t fancy buying AstraZeneca at today’s far higher valuation of 41.26 times earnings.
Yes, GSK could lose that court case. Much of the risk is priced in. The shares are now trading at the same level as they did 10 years ago. The next decade has to be better, doesn’t it? Although, next time a portfolio holding drops 10%, I’ll do my research before loading up.
