I’m late to the party but Glaxosmithkline (LSE: GSK) is the latest stock to find a home in the Shares and Stock Markets Portfolio mainly to add some ballast to an otherwise speculative stock selection.
I opened a position on Monday but hadn’t had time to update the website due to my focus on the private business which is the reason why the Shares and Stock Markets portfolio is beating the market: the private business’ free cash flow is being reinvested into the purchase of:
- Physical precious metals
Why I Purchased Shares In Glaxosmithkline
I saw a ridiculous Q1 forecast for Glaxo flash across my screen the other day.
Something about a selected bunch of analysts and what they had to say about future revenue and earnings.
I say ridiculous because I never pay any attention to any forecasts preferring to lose money on my own without the help of people who have no interest helping me select stocks.
That aside Glaxo came up on one of the screens I run from time to time to see if I can sniff out a bargain.
I’ve named the screen after the strategy from which it is stolen: Ben Graham’s Relatively Unpopular Large company.
I’ve also written extensively on this website about the ins and outs of the particular branch of value investing and produced an ebook going into details as to how you can get started with it.
At it’s core the strategy calls for buying large cap stocks when they become cheap relative to their long term earnings and are going through a period of unpopularity.
Unpopularity in this case is an unscientific term but it can include things such as:
- Reduced earnings
- A scandal (think Volkswagen)
Anything that will make or has already made the share price start to decline.
The most impressive feature of Glaxo’s valuation is the rising dividends even though they may have plateaued a little recently which given the high yield is not surprising and it wouldn’t surprise me if the dividend is cut back a little.
Returns on equity and capital employed are just ridiculous.
The Volkswagen scandal was a good time to buy it’s stock
Glaxo has had it’s fair share of problems which has influenced the lower valuation for it’s stock but it appears that those problems are behind it or are at least being dealt with.
CEO Andrew Witty’s retirement announcement and the switch to a lower margin yet less risky business model with Novartis are two standout issues.
Even so this is what I saw:
- PE Ratio of 8.5
- Rising dividends going back a decade (as far as my data feed allows)
- The business is going through a period of unpopularity
That is all.
On this basis I bought a full 5% position and if the stock price decides to back near £12.00 then I’ll buy more.
Are you a Glaxosmithkline stock holder?
Do you agree with the CEO when he states earnings growth in 2016 should be between 10-12%?