When markets wobble as they have this week, attractive buying opportunities can spring up.
Taking advantage of these needs advance planning — and that’s when a watch list can be invaluable. Keeping a list of stocks you’ve already researched makes it much easier to snap up a bargain when a correction hits the market.
Reassuring performance
Today’s full-year results from medical technology company Smith & Nephew (LSE: SN) received a cautious reception. Sales of the group’s replacement joints and wound care products lifted underlying revenue by 3% to $4.8bn, while operating profit surged 16% higher to $934m. This lifted the group’s operating margin from 17.2% to a very credible 19.6%.
Cash generation also improved, driving down net debt by $269m to $1,281m. Shareholders were rewarded with a 14% increase to the dividend, which rose to 35 cents per share. That’s equivalent to a yield of about 2% at current prices.
Catalyst for change?
During the years that I’ve been following this stock, it’s always looked a little expensive relative to its growth rate. That’s still the case today. Guidance for 2018 indicates that sales are expected to rise by 3%-4% on an underlying basis this year, while adjusted operating margin is expected to improve by a further 0.3%-0.7%.
US tax cuts should help to lift profits, but once again the company doesn’t expect to deliver the kind of market-beating growth that could indicate a major step forward.
However, given the ageing population of most developed countries, it’s clear this business operates in a structural growth market. The arrival of a new chief executive later this year could be the catalyst for change many analysts believe Smith & Nephew needs.
Recent falls have left the stock looking more affordable, on a 2018 forecast P/E of 18. I’m starting to get interested, and will consider buying if the shares continue to head lower.
This high flyer could go further
Budget airline easyJet (LSE: EZJ) needs no introduction. But the group’s growth and apparent quality probably does deserve a closer look.
In January, it reported an 8% increase in passenger numbers during the final quarter of 2017. Revenue for the period rose by 14%, which equates to an increase of 6.6% per seat. This was the result of strong growth in sales of extras, plus some currency benefits.
One thing that caught my eye was the group’s increased focus on long-haul flying. Although it only operates short-haul flights, its Worldwide by easyJet programme is being expanded to allow customers to book long-haul flights directly through the airline. This means that cover is provided for missed connections, and practicalities like bag transfer are simplified.
I don’t know whether this is the first element of a move into operating long-haul flights, but it’s worth noting that the long-haul market hasn’t yet had the full budget treatment. There could be an opportunity here.
Why I’d buy
In the meantime, growth in demand for short-haul travel appears to remain strong. I believe easyJet is one of the best ways to play this trend. Adjusted earnings per share are expected to rise by 16% this year and by 25% in 2018/19.
With the stock trading on a 2018 forecast P/E of 17 and offering a 2.8% yield, I’d certainly be keen to buy on any dips.