Finding grossly undervalued stocks when the FTSE 100 is above 7,000 points may sound tough. After all, the index is flying high following a year that has seen its price level soar by 28%. However, there are a number of stocks which could be undervalued, based on their growth potential. Here's a company that could fall into this category, and may deliver stunning total returns in 2017 and beyond.
GlaxoSmithKline(LSE: GSK) could prove to be undervalued thanks to its impressive pipeline of new drugs. Its update this week showed that while treatments such as its leading asthma drug, Advair, could see sales falls of up to 45% as generic drugs hit the market, its long-term growth potential remains sound. The company is set to receive the results of up to 30 clinical trials in the next two years, which could eventually act as positive catalysts on its share price.
Furthermore, GlaxoSmithKline continues to offer a potent mix of the growth potential of a pharmaceutical business combined with a relatively stable consumer goods operation. This means that while it has the scope to bring blockbuster drugs to market, which cause its sales to increase dramatically, it also offers investors a degree of stability through products such as Gaviscon and Nicorette.
In the current year, the company is expected to record a rise in its earnings of around 9%. When combined with a price-to-earnings (P/E) ratio of 15, this equates to a price-to-earnings growth (PEG) ratio of 1.7. This indicates that the company offers excellent value for money, given the fact that it should benefit from weaker sterling and higher demand for healthcare as the world population grows and ages.
Of course, GlaxoSmithKline will need to grow without its current CEO, Sir Andrew Witty. He will leave the company next month to be replaced by current consumer healthcare leader Emma Walmsley. She's likely to provide continuity, which reduces the risks arising from a change in leadership. And while there have been calls for a split in the company between its pharmaceutical and consumer divisions, the balance provided and the growth opportunities they offer suggest the stock is a stunning long-term buy.
A riskier alternative?
Trading on an even lower valuation is sector peer Shire(LSE: SHP). It has a PEG ratio of only 0.6 thanks in part to a rapidly growing bottom line. Its earnings are due to rise by 21% this year, followed by further growth of 15% next year as its combination with Baxalta begins to positively impact on its financial performance. Of course, there are question marks as to whether the two companies will prove to be a good fit. But with substantial synergies, the deal looks set to boost Shire's long-term performance.
While it's cheaper than GlaxoSmithKline and has better growth prospects, Shire lacks the diversity of its larger peer. As such, based on their risk/reward ratios, GlaxoSmithKline appears to be a stronger investment and one of the best value stocks in the FTSE 100.
Peter Stephens owns shares of GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.