The FTSE 100 index has retreated from its highs around 8,300. One reason for that is the government’s narrative that it will need to take tough decisions to rebalance public finances and boost the economy over the long run.
This is in stark contrast to the US where Donald Trump’s re-election on a tax-cutting ticket has seen American stocks surge to new highs. But despite the supportive growth trends that could come from lower taxes, I think US stocks have stretched valuations.
Finding cheap gems on the FTSE 100
The FTSE 100 currently offers good value for investors, with its price-to-earnings (P/E) ratio and dividend yield appearing attractive compared to other major indexes, especially the US. Many blue-chip companies with global operations — not UK-focused operations — are trading at discounted valuations, potentially presenting opportunities for value investors.
However, it’s important to note that not all FTSE 100 companies are diamonds in the rough or hidden gems. The index’s heavy exposure to cyclical sectors like oil, mining, and banking can lead to volatility and unpredictability. Moreover, some companies may be facing structural challenges or operating in low-growth industries, which could limit their potential for significant returns.
Additionally, we’ve got to think about sentiment. The index hasn’t performed overly well since Labour came to power and promised to make tough decisions to get the country back on track. There aren’t many catalysts on the horizon.
As such, I’m taking a careful approach to investing in the FTSE 100, hand-picking some of my favourite stocks that are worthy of more attention and maybe my money.
A focus on pharma
I’m particularly interested in pharma and biotech because I’m inherently interested in the impact these companies can have on our lives. Unlike investing in tobacco, pharma companies can be a force for good — I know not everyone agrees.
Pharma stocks haven’t performed overly well in recent months, anywhere in the world. There are a number of reasons for this including anti-vaxxer Robert F Kennedy’s potential influence over the Trump presidency.
However, I believe GSK (LSE:GSK) is certainly a key stock to watch. It’s been discounted for some time because of the lawsuits relating to Zantac, however 93% of those cases have now been settled.
Now, the stock is sinking again but it appears overlooked and undervalued to me. The company is expected to report earnings of 91p per share this year, and that then rises to 143p in 2025 and 159p in 2026.
In turn, this means a P/E ratio of 15.1 times for 2024, which then falls to 9.5 times in 2025 and 8.6 times in 2026. These are attractive metrics — below the index average — especially when coupled with the 4.4% forward dividend.
I think the beaten-down share price may also reflect concerns about the company’s newly found independence. There’s no recent track record for how well this business can perform without its consumer healthcare division. As a standalone entity it’s something of an unknown.
Personally I’m also buoyed by the fact the stock trades at a 32% discount to the average share price target. For investors with patience, this could be a great opportunity to consider. I’m going to keep a very close eye on this stock.
This post was originally published on Motley Fool
