The FTSE 100 has slumped nearly 10% so far this year. It would be easy to think that you’d have done better to keep your money in a cash savings account. At least the 1.5% tax-free interest available from a typical best-buy cash ISA would have given you a positive return.
Personally, I’m not so sure. A gain of just 1.5% per year means your money is probably losing value after inflation, which is currently 2.4%.
Although the value of a FTSE 100 tracker may be down this year, you should still have received 3-4% in dividends. Plus there’s every chance that the FTSE 100 will bounce back, in time, delivering further gains.
Beat the market
If you invest directly in hand-picked stocks, much larger gains may be possible. FTSE 100 pharmaceutical group AstraZeneca (LSE: AZN) has risen by 20% so far in 2018.
The company’s long-running turnaround finally seems to be delivering results. On Monday, the group announced that the US Federal Drugs Administration had granted Fasenra Orphan Drug Designation for the treatment of a rare autoimmune disease, EGPA.
Although I don’t expect this to be a major earner, I do think it suggests that the company’s revamped research and development policy is starting to deliver results.
A turning point
Since taking charge six years ago, chief executive Pascal Soriot has spent a lot of money on R&D. Soriot now believes that the tide has now turned for AstraZeneca. Earlier this month, he told investors:“Today marks … what we expect will be the start of a period of sustained growth for years to come.”
City analysts seem to agree. After falling for several years, broker forecasts suggest that the group’s adjusted earnings will rise by 13% in 2019. If this marks the start of a long run of growth, then the shares could be worth buying.
However, I think it’s worth noting that after climbing 77% in five years, AstraZeneca stock no longer looks cheap. In January 2012, the group had a net cash position of $2.9bn. The firm’s latest accounts show it now carries net debt of $16.2bn.
In my opinion, this level of debt should be manageable for a company that’s expected to generate a profit of about $4.3bn in 2018. But with the shares now trading on 21 times forecast earnings, I believe significant earnings growth will be needed to justify a buy rating on the stock.
Personally, I’d continue to hold the shares at current levels, but I believe better opportunities are available elsewhere for new investors.
Down 80%, is this stock too cheap?
One pharma stock that may attract the attention of value investors is FTSE 250 firm Indivior (LSE: INDV). This company’s main commercial product is Suboxone Film, a patented treatment for opioid addiction.
Indivior’s share price has fallen by about 80% since June, as the firm has fought a losing legal battle to prevent the market launch of a much cheaper generic alternative to Suboxone Film.
Indian firm Dr Reddy’s Laboratories now appears to be close to being able to launch its product in the US market. Once this happens, Indivior expects to lose “up to 80% of its market share within a matter of months.”
Indivior shares may look cheap on 5 times 2018 forecast earnings. But such massive uncertainty means that I believe Indivior is only suitable for expert investors.