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Appreciating the low volatility stocks

By Brenda Kelly - IG Market Strategist

Date: Tuesday 22 Oct 2013

Appreciating the low volatility stocks

It’s always deemed prudent to have some capital invested in defensive stocks and have some low volatility shares in one’s holdings.

A company that is strong on innovation as well as rewarding shareholders through dividends and share buy-backs would tend to fit within that role.

Given that GlaxoSmithKline has a beta – its volatility ratio against the benchmark – of 0.6, one would not expect that any downturn in the market would unduly concern the stock holder of this pharmaceutical company.

Right now, GSK is seeking regulatory approval for the world’s first malaria vaccine and the drug is proving promising, with availability mooted by some analysts as soon as three years from now. Second only to tuberculosis in its impact on world health, malaria kills around 800,000 people per year.

So to support a company that is trying to prevent and cure such a terrible disease has a nice effect on the moral compass too.

On the downside for your moral compass though, GSK had some poor press in respect of bribery allegations in China. But from an investment point of view, these are not expected to impact revenues too much given the group’s low exposure there.

For the present third quarter, a 1.8% rise in revenue to £6.645bn is expected.

A number of brokerage firms have issued ‘buy’ ratings on the stock and the price targets for the majority would imply that there is approximately 20% upside in the stock. Deutsche Bank, for instance, has a target of 1,850p; Panmure Gordon has the very same view.

The company does hold a lot of debt and carries a heavily leveraged balance sheet with $16bn in long-term debt.

Based on a p/e ratio of 13 for predicted earnings in the year to 2014 makes Glaxo slightly cheaper than its peers, though.

The technical bit

The technicals are interesting for this stock.

The double top on the weekly chart would appear to have been confirmed, yet the 50 week moving average is supporting the price action and has thus seemingly reversed the possibility of a move back to the 1400p levels.

The brief foray and return through the 50% Fibonacci retracement from the November lows to the May highs tends to act as a bullish indicator.

Price action in the stock may not elicit wolf whistles on the trading floor but sometimes having a decent dividend yield more than makes up for that.

BK

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