As GSK’s share price drops 15%, should I buy, sell, or hold?

GSK’s share price has fallen on negative developments for two of its drugs, but it still has a strong core business with excellent growth prospects.

| 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.

Image source: GSK plc

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.

GSK’s (LSE: GSK) share price action raises the classic investor question for me of how to proceed. Should I keep my holding, maybe even add to it, or sell out?

Why is it down?

The first thing I need to do is to work out why it has dropped 15% since its 15 May 12-month traded high of £18.12.

There are two reasons that I can see. First, a US court ruled on 31 May that 70,000+ lawsuits can move forward to trial. These allege a connection between GSK’s Zantac drug and cancer. This raises the risk of very high compensation awarded against GSK if its further appeals against the action are unsuccessful.

And second, 26 June saw the US Centers for Disease Control and Prevention (CDC) no longer recommend Arexvy RSV vaccine for people under 60.

Earlier in the month, the US Food and Drug Administration had approved the use of this vaccine for those aged 50 to 59. It is the first shot endorsed for that age group.

Nonetheless, the CDC’s decision is likely to reduce Arexvy sales, unless it changes its view. GSK had expected the vaccine to generate annual sales of more than £3bn.

Are there any offsetting factors?

My experience as a former investment bank trader tells me that I should not assume either of these negative factors will improve. If they do, it will be a bonus.

So, what else is there in GSK that might offset these negative developments over the long term?

Its Blenrep drug was found on 7 March to help in extending life in plasma cell cancer patients. Citigroup analysts expect around £2.5bn of peak risk-adjusted sales of the drug.

Its full-year 2023 results — before the latest Zantac and Arexvy developments – contained upgrades in its long-term outlook.

Adjusted operating profit was forecast to grow at a compound annual rate of 11%+ to 2026 on an annual sales rise of 7%+. By 2031, it expected sales of more than £38bn.

No new financial statement has been released regarding the impact of the Zantac and Arexvy news. However, GSK will announce its Q2 2024 results on 31 July.

Relative share valuation now

Its shares trade on the key price-to-earnings ratio (P/E) at 13.7. This is the lowest among its peers, which have an average P/E of 29.9.

This group comprises Johnson & Johnson at 21.3, Hikma Pharmaceuticals at 28, Hutchmed at 31.8, and AstraZeneca at 38.4. Consequently, on this basis, GSK looks very undervalued.

Moreover, analysts’ estimates currently say GSK’s earnings will grow by 12% a year to end-2026.

So what’s my play here?

It was always hammered home to me as an investment bank trader never to buy into a fast-falling asset. That advice has served me well, so I will not buy more GSK shares right now.

That said, as a long-term investor now I am aware that fundamentally solid stocks – and I see GSK as one – will likely do well over time. So, I will not sell my holding either.

In sum, I will hold my GSK position and see what happens from here, especially with the Q2 results on 31 July.

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.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Simon Watkins has positions in AstraZeneca Plc and GSK. The Motley Fool UK has recommended AstraZeneca Plc, GSK, and Hikma Pharmaceuticals Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

Just released: our top 3 small-cap stocks to consider buying in October [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

How I’d use an empty Stocks and Shares ISA to aim for a £1,000 monthly passive income

Here's how using a Stocks and Shares ISA really could help those of us who plan to invest for an…

Read more »

Investing Articles

This FTSE stock is up 20% and set for its best day ever! Time to buy?

This Fool takes a look at the half-year results from Burberry (LON:BRBY) to see if the struggling FTSE stock might…

Read more »

Investing Articles

This latest FTSE 100 dip could be an unmissable opportunity to pick up cut-price stocks

The FTSE 100 has pulled back with the government’s policy choices creating some negative sentiment. But this gives us a…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

As the WH Smith share price falls 4% on annual results, is it still worth considering?

WH Smith took a hit after this morning’s results left shareholders unimpressed. With the share price down 4%, Mark Hartley…

Read more »

Investing Articles

The Aviva share price just jumped 4.5% but still yields 7.02%! Time to buy?

A positive set of results has put fresh life into the Aviva share price. Harvey Jones says it offers bags…

Read more »

Investing Articles

Can a €500m buyback kickstart the Vodafone share price?

The Vodafone share price has been a loser for investors in recent years, and the dividend has been cut. We…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »