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The Beginners’ Portfolio is a virtual portfolio, which is run as if based on real money with all costs, spreads and dividends accounted for.
One thing you should definitely do, especially when you’re still learning the ropes, is look back at your previous decisions and ask “What if…?”
With a few of our decisions, we’ve been torn between the top two companies in a sector, and we’re getting far enough in now to look back and see how we’d have done had we made the opposite choice.
The best Big Pharma?
It’s nearly 16 months since I plumped for GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) over AstraZenenca (LSE: AZN) (NYSE: AZN.US), so how would the portfolio be looking now if I’d made the opposite decision?
On 12 June 2012, we picked up GlaxoSmithKline shares for a purchase price of 1,440.5p, and on the same day we could have had AstraZeneca for an estimated 2,666p (going on the mid-price, and assuming similar spread to today). For our £500, we’d have been able to buy 18 shares for a total price of £429.33.
Today, with the price having slipped back over the past couple of months after good progress, GlaxoSmithKline shares would sell for 1,551.5p apiece, with AstraZeneca shares fetching 3,128p. After charges, if we’d bought AstraZenenca shares and we sold today, we’d be up 12.3%, while in reality we’re only up 3% from GlaxoSmithKline.
Dividends too
Then there are dividends, and GlaxoSmithKline has added £31.62 to the pot so far. Over the same period, we’d have had £42.97 from AstraZeneca, so we have the loser on both counts. In fact, the comparison looks like this:
| Company | Buy | Sell | Change | Divi | Total | % |
|---|---|---|---|---|---|---|
| GlaxoSmithKline | £502.22 | £517.51 | £15.29 | £31.62 | £46.91 | 9.3% |
| AstraZeneca | £492.33 | £533.04 | £60.71 | £42.97 | £103.68 | 21% |
(Note this compares total values of the investment, not share prices)
Today’s valuation
So what does current valuation look like? Here are the figures, based on current forecasts:
| GlaxoSmithKline | EPS | % | P/E | Divi | Yield | Cover |
|---|---|---|---|---|---|---|
| 2013 | 116p | +2% | 13.4 | 77p | 5.0% | 1.51x |
| 2014 | 127p | +10% | 12.2 | 82p | 5.3% | 1.55x |
| AstraZeneca | EPS | % | P/E | Divi | Yield | Cover |
|---|---|---|---|---|---|---|
| 2013 | 321p | -20% | 9.8 | 181p | 5.7% | 1.78x |
| 2014 | 301p | -6% | 10.4 | 182p | 5.7% | 1.65x |
(Source: Digital Look)
AstraZenenca would clearly have been a better investment over the past 16 months, and it’s arguable that it looks better valued on these forecasts, too. And over the short term, I think I would go along with that.
But I think what we’re really looking at here is one company that has been doing everything right, moving with the technology, positioning itself correctly for the future, and bringing in rising earnings — that’s GlaxoSmithKline, and its valuation reflects that success.
AstraZenenca, on the other hand, has seen where it is going wrong and is taking steps to refocus on its key strengths — and I have to say I’ve been impressed by new chief executive Pascal Soriot so far. But we’re not there yet and it will take time, and we really need to see a return to earnings growth to regain confidence.
AstraZenenca shares are probably oversold right now and they do look better value in the short term. But GlaxoSmithKline has the better pipeline and is ahead technologically, and for the long term I think it’s better to pay more for higher quality and lower risk.
I’m still happy with our choice.