There’s a lot of chatter this week about a potential stock market correction. This comes hot on the heels of an update from the Bank of England (BoE) that contained a warning for investors.
The bank noted that investors are “placing less weight on risks, such as geopolitical developments or continued high inflation”, which make it more likely that there could be a sharp correction in asset prices.
Now, to be clear, the BoE isn’t pointing to the timing of the next market decline. However, the central bank is saying that some investor complacency may be creeping in. That got me thinking: which stock would I want to buy if we did see a decline?
The pharma group on my watchlist
As a reminder, a stock market correction is generally defined as a decline of at least 10% from a recent high. A crash is considered to be a drop of 20% or more.
While that may be scary to some, I consider myself a long-term investor. That means I’m willing to look through some short-term uncertainty to pick up some high-quality stocks at bargain prices.
The FTSE 100 is up 8.5% since the start of the year but I still consider it a happy hunting ground. Over that same time, I’ve watched the GSK (LSE: GSK) share price climb only 1.5% to 1,500.5p.
Despite lagging the broader index, I like the company’s fundamentals. With a market capitalisation of over £60bn and a 3.9% dividend yield, GSK ticks a lot of my boxes.
One of the world’s leading pharmaceutical companies, the GSK share price has been under pressure of late. Recent official guidance in the US narrowed the addressable market of its Arexvy vaccine. This, combined with ongoing lawsuits related to the its discontinued Zantac heartburn medication, hasn’t helped the share price.
However, if we were to see a UK stock market correction, I’d like to invest in GSK. The company is an industry leader with significant research and development (R&D) activities that totalled £6.2bn in 2023. I believe that economies of scale can benefit GSK and drive long-term value during my long-term investment horizon.
On top of that, demand for drugs tends to stay constant, regardless of the economic cycle. I like the industry’s defensive characteristics and GSK could provide a diversification benefit to my portfolio.
With a price-to-earnings (P/E) ratio of 14, it’s fair to say GSK isn’t the cheapest stock out there right now. However, a broader market decline may well impact its valuation and I’ll be waiting on the sidelines to buy.
Foolish takeaway
I’m a fan of GSK’s business and the sector in which it operates, but there are risks that may impact my investment thesis.
We’ve seen in recent weeks that regulatory hurdles can swing the potential sales of a new drug. The possible threat from lawsuits and failure rate of new products in the R&D pipeline can also impact on valuation.
However, I’m a believer in backing long-term leaders in their field. If we were to see a stock market correction, GSK is one stock I’d be looking to buy.
This post was originally published on Motley Fool
