GSK plc (GSK): Why Are Hedge Funds Bullish on This Undervalued UK Stock Now?
We recently compiled a list of the 10 Best Undervalued UK Stocks To Buy Now. In this article, we are going to take a look at where GSK plc (LON:GSK) stands against the other undervalued UK stocks.
The Economy of the United Kingdom
According to a report by KPMG, the economy of the UK is going through a combination of consumption tailwinds and falling inflation which is expected to support modest positive growth in the country for the remainder of 2024 and in 2025. The United Kingdom’s economy is projected to achieve GDP growth of 0.5% in 2024, and 0.9% in 2025, while inflation is expected to hold steady at 2.6% in both 2024 and 2025. Unemployment rates are also projected to be 4.5% in 2024 and 4.9% in 2025. The interest rates are anticipated to drop towards 3% by the end of 2025 and elections are likely to resolve political uncertainty, which would encourage business. However, geopolitical uncertainty, conflicts, and trade tensions could lead to inflation spikes and sharp shifts in monetary policies. Despite the uncertainty, KPMG's analysts remain optimistic about the future. Yael Selfin Vice Chair and Chief Economist at KPMG United Kingdom said:
“Global economic prospects are better for 2025, with inflation expected to return towards target and central banks more confident to cut policy rates from the current restrictive levels. The silver lining is a tailwind for big-ticket consumer purchases and business investment. Merger and acquisition activity could also continue to gather steam, as financial conditions ease and dry powder is deployed. However, the uncertainty remains around the political shifts, which could see more insular and protectionist economic policies.”
Investors view the UK market as particularly appealing due to its current valuations, which are similar to those of emerging markets when measured on a forward price-to-earnings basis. The UK equity index stands out for its substantial exposure to the energy sector, which could benefit significantly if the global economy outperforms expectations. Additionally, in times of escalating geopolitical tensions, the energy sector might also see gains, driven by rising prices. The composition of the UK equity market is well-structured, especially in terms of dividend yields and volatility. Compared to European equities, UK stocks are less volatile and offer higher dividend yields, making them an attractive option for investors at this time. Goldman Sachs is also anticipating modest growth in the United Kingdom’s 2025 and 2026 economic growth and forecasts the FTSE 100 Index to rise to 7,900 by the end of 2024. Goldman Sachs said:
“Low valuation, improving global demand and low supply aiding commodities stocks, and continued buybacks all support FTSE 100. We do not expect UKX to underperform as it did in 2023,”
According to Emma Wall, Head of Investment Analysis at Hargreaves Lansdown, the UK offers one of the best value opportunities among developed markets, particularly for those looking for undervalued investments. Despite its high performance in the FTSE 100, it is highlighted as being on a 45% discount compared to the U.S. market. Emma Wall sees the best value opportunity in the UK, citing the significant discount, international revenues, lack of leverage, and expectations of high dividend payouts as key reasons for this analysis.
The UK market presents a unique and compelling opportunity for investors, as the global economy shows signs of improvement and inflation stabilizes, the UK will benefit from economic growth despite some uncertainties, with that in context let’s take a look at the 10 best undervalued UK stocks to buy now.
Our Methodology
For this article, we used the Finviz screener to screen for UK-based companies that are trading at a forward P/E ratio of under 20 as of August 9. We listed the stocks according to their hedge fund sentiment, which was taken from our database of 920 elite hedge funds as of Q1 of 2024.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A doctor and a patient discussing a therapy plan that includes pharmaceutical products.
GSK plc (LON:GSK)
Number of Hedge Fund Investors: 41
Forward P/E ratio as of August 10: 9.87
GSK plc (LON:GSK) is a global biopharma company that develops and manufactures vaccines, specialty medicines, and general medicines. The company is known for its medicines for treating diseases such as HIV, respiratory issues, cancer, immunology, neurology, metabolism, and cardiovascular conditions. GSK plc (LON:GSK) has a market cap of $82.10 billion as of August 10 and employs 70,000 people across 75 countries, operates 37 manufacturing facilities. GSK plc (LON:GSK) sells its products through wholesalers, pharmacies, hospitals, physicians, and other groups worldwide.
On July 3, GSK plc (LON:GSK) announced that they have restructured their existing collaboration with CureVac N.V. (NASDAQ:CVAC) into a new licensing agreement which allows GSK to develop and manufacture seasonal influenza and COVID-19 vaccines and rights to commercialize. This agreement is part of GSK's ongoing investment in vaccine technologies aiming to create top-tier vaccines and enhance its mRNA capabilities. CureVac will receive an upfront payment of $511.61 million, with the potential for up to an additional $1.34 billion based on development, regulatory, and sales milestones. GSK plc (LON:GSK) is investing heavily in smart manufacturing within the biopharma industry and focusing on how technologies like robots, machine learning, and artificial intelligence can revolutionize the production of medicines and vaccines by real-time monitoring of production processes, improving yields, and predicting equipment maintenance needs. GSK plc’s (LON:GSK) successful launch of Arexvy, a vaccine for respiratory syncytial virus (RSV) in older adults, in both the U.S. and Europe also helped the company to achieve sustainable growth and expand profit margins. In its Q3 2023 investor letter, Ariel Global Fund made the following comment about GSK plc (NYSE:GSK):
“Global pharmaceutical and healthcare company, GSK plc (NYSE:GSK), also advanced in the period following a top- and bottom-line earnings beat and subsequent raise in full-year guidance. Shares were also aided by a successful U.S. and European launch of Arexvy, a respiratory syncytial virus (RSV) vaccine for older adults. Although risks around the Zantac litigation remain a concern, we believe GSK should generate sustainable growth and margin expansion as the company transitions its Pharma pipeline towards specialty medicines and vaccines. Furthermore, the company’s robust balance sheet provides the scope for bolt-ons, which has the potential to drive additional growth.”
Investing in GSK presents a compelling opportunity due to its forward P/E ratio of 9.87, which represents a 50% discount compared to the sector. As of the first quarter, the stock is held by 41 hedge funds for a total value of $1.84 billion. Fisher Asset Management is the largest shareholder in the company and owns 15.66 million shares amounting to $671.70 million as of March 31.
Overall GSK ranks 3rd on our list of the best undervalued UK stocks to buy. You can visit 10 Best Undervalued UK Stocks To Buy Now to see the other undervalued UK stocks that are on hedge funds’ radar. While we acknowledge the potential of GSK as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than GSK but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
Read Next: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and Jim Cramer is Recommending These 10 Stocks in June.
Disclosure: None. This article is originally published at Insider Monkey.