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Right now, I view the FTSE 100 as one of the world’s cheapest market indices. In historical and geographical terms, the Footsie has rarely been so lowly rated. Hence, I often go rooting for bargains among the UK’s largest listed companies. What I look for are outstanding companies whose share prices have taken a knock. In short, I’m on the lookout for ‘fallen angels’: great businesses with weakened share prices, but with potential for future capital growth (and dividend income).
The FTSE 100’s risers and fallers
Over the past three months, the FTSE 100 has slipped slightly. From Friday, 9 July to this Friday (8 October), the index has lost just over 20 points (-0.3%). Meanwhile, some Footsie stocks have crashed over the past quarter-year.
Over the last three months, 52 of the FTSE 100’s 101 stocks (one is dual-listed) have gained in value. These gains range from a bumper 71% to a tiny 0.1%. The average gain across all 52 winners is 8.8% (9.1 percentage points ahead of the wider index). At the other end of the scale lie 49 stocks that have lost value since 9 July. The smallest decline among these losers is a mere 0.6%, while the largest is more than a quarter (-27.3%). The average loss across these 49 laggards is 8.7%. But 16 of these slumpers recorded double-digit declines (of 10%+), while three lost more than a fifth (20%+) of their value. Ouch.
One flop stock might be a hidden gem
These are the FTSE 100’s three biggest losers over the past three months:
| Company | Sector | 3-month loss |
| Smith & Nephew | Medical appliances | -20.3% |
| BT Group | Telecoms | -21.1% |
| Royal Mail | Postal services | -27.3% |
Two of these companies are former state-owned businesses: BT Group and Royal Mail. Both are undergoing transformational change to adapt to this digital age (and both have huge pension deficits). But I’m surprised to see Smith & Nephew at #99 in my list of FTSE 100 flops. For me, S&N is a great British business whose share price might have fallen too far.
Why I like S&N
As I write on Friday afternoon, the Smith & Nephew share price stands at 1,256p. S&N stock is down 2.2% over five days, 7.7% over one month, and 20.3% over three months. It’s also down 10.3% over six months and 17.7% over one year. In short, S&N shares have been declining for much of 2020-21. One reason is that the company makes medical devices for use in orthopaedics; sports medicine and ENT (ear, nose and throat); and advanced wound management. Because of the Covid-19 pandemic, routine and elective surgeries have been deferred across the globe. Thus, fewer hip and knee replacements mean lower sales for this £11.1bn FTSE 100 firm.
At their 52-week high, S&N shares hit 1,681.5p on 20 January 2021. Nine months later, they hover just 29p above their 52-week low of 1,227p hit yesterday (Thursday, 7 October). They currently trade on a price-to-earnings ratio of 27.1 and an earnings yield of 3.7%. S&N also offers a dividend yield of 2.2% a year, almost two percentage points below the FTSE 100’s forecast yield of 4.1% for 2021. But these ratings could well change favourably if/when we conquer Covid-19 and healthcare gets back to normal.
I don’t own this FTSE 100 stock, but would buy it today as a prime candidate for a post-Covid-19 recovery. However, if the coronavirus keeps mutating or persists well into 2022-23, then this would be bad news for the world — and the S&N share price!
Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended Smith & Nephew. 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.
