The Motley Fool: A diversified GlaxoSmithKline is delivering
The Motley Fool Take
If you’re looking for a high-yield, low-volatility stock, consider big pharma stalwart GlaxoSmithKline (NYSE: GSK). It’s facing declining sales of its asthma and chronic obstructive pulmonary disease (COPD) drug Advair due to patent exclusivity expiration, but generic versions have yet to hit the market. A few are expected within the next three years, though, and sales of the $8 billion-a-year drug are certain to decline, perhaps precipitously.
Fortunately, GlaxoSmithKline has conducted a transformational asset swap with Novartis. It sold its small-molecule oncology development platform for $16 billion, acquired Novartis’ vaccine operations (minus influenza) for about $7 billion, and the duo formed a joint venture for their consumer health products divisions.
These moves helped GlaxoSmithKline diversify its revenue stream and improve its margins and pricing power within all three of its operating segments: pharmaceuticals, vaccines and consumer health products.
New drug launches are another source of growth. GlaxoSmithKline is the majority owner of ViiV Healthcare, the company behind innovative HIV medicines Triumeq and Tivicay. Sales of both drugs combined have more than doubled through the first half of 2016.
Meanwhile, GlaxoSmithKline’s Breo Ellipta and Anoro Ellipta inhalers are experiencing a sales surge. The gains from new drug growth are eclipsing losses from declining Advair sales. Sporting a 4.7 percent yield, GlaxoSmithKline is a solid, income-producing portfolio candidate.
Ask the Fool
Q: What does it mean if a bank “initiates coverage” on a particular stock? - H.W., Hendersonville, North Carolina
A: When a bank or brokerage initiates coverage of a company, its analysts will now be following the company, and they will probably issue an official opinion on it. (Common ratings are “buy,” “hold” or “sell.”) There may also be a detailed research report available on the stock, which will be much more illuminating than a simple one-word rating.
“Sell” ratings have long been relatively rare. That’s because since these ratings often come from companies with investment banking operations, the companies haven’t wanted to burn any bridges with current or potential investment banking clients by being too negative.
Many brokerages offer gobs of research reports on companies. See what yours offers, or look for a better brokerage at fool.com/how-to-invest/broker/.
Q: What are pair trades? - P.D., Columbus, Ohio
A: A pair trade occurs when two related trades are made at the same time. One is a “long” position, where an investor buys a stock with the expectation that it will increase in value, and the other is a “short” position, where the investor borrows and sells a stock he or she expects will fall, planning to buy it back later at a lower price. (Shorting a stock sounds weird, but it’s legal.)
For example, if you expect people to increasingly have yogurt for breakfast and to eat less cereal, you might buy stock in a yogurt manufacturer, while shorting a cereal specialist. If you’re right on both counts, you make money, and if one count is wrong, its loss might be countered by the other one’s gain.
My Dumbest Investment
I have never, ever made money on a semiconductor stock. I am finished with them. Forget it. They’re way too fickle and unpredictable for me. - A.H., Detroit
The Fool responds: A key thing to understand about semiconductor stocks is that they’re cyclical. They will go through boom and bust periods, as the economy heats up and cools off. If you don’t understand that and you jump in after some stocks have surged, you may be in for a rude awakening.
While some semiconductor chips are highly specialized, many others have become commodities — which means they have little pricing power and have to be very competitive. They often have very thin profit margins. The fortunes of many semiconductor companies will rise or fall based on the work they’re contracted to do. A company may have provided chips for a blockbuster smartphone, but if its offerings are not included in the next version of the phone and it loses a major customer, it will fall on very hard times.
It’s A-OK to rule out industries that don’t interest you or ones you don’t understand well. Fortunately, there are many industries out there, and many compelling companies within most of them. For best results, stick with what truly interests you and what you’ve researched diligently, where you are very familiar with the major players, their competitive positions, strengths, weaknesses and growth prospects.