With the pandemic appearing to be almost coming to an end — assuming no new variant comes up — the FTSE 100 stocks that have been lagging behind so far may well begin to catch up. Two such caught my attention recently after they released updates. I liked them even before Covid-19, to be sure. But the last couple of years have made them questionable investments at a time when many others looked like sure-shot bets.
Smith & Nephew: Improving financials
The first of these is the healthcare stock Smith & Nephew (LSE: SN). The stock was put in a unique position despite being a classic defensive during the latest slowdown. Typically, as an investor I would expect its share price to appreciate during a slow down. But since the last economic slump was also associated with lockdowns and the health hazard associated with stepping out of the house, the company took a hit. That is because its big revenues come from supplying parts required for hip and knee replacement surgeries. And these are non-essential medical procedures in many cases.
As a result, demand for its products fell, which showed up in its results too. It has, however, managed to bounce back up in the past year to pre-pandemic revenues now. Its profits have also risen from the year before, as per the latest numbers released this week. It also expects to continue to improve its earnings next year, all of which are encouraging signs for the stock. However, the one drawback for the stock is its valuation, as measured by the price-to-earnings (P/E) ratio, which is already a bit high. At almost 30 times, I believe that Smith & Nephew could do with a share price dip. I like the stock and I want to buy it in 2022, but I’ll wait for the right time.
InterContinental Hotels Group: FTSE 100 recovery stock
InterContinental Hotels Group (LSE: IHG) is another recovery stock I like. Hospitality has been one of the worst hit industries during the pandemic, and that shows in the state of this FTSE 100 stock. It has fluctuated a lot around a flat trend line over the past year. Still, I think the stock could be in for better times. As per its full-year results for 2021, it has swung back into profits again after showing a loss in 2020. It has also decided to reinstate its dividend.
But the challenge with this stock is similar to that for Smith & Nephew. Probably in anticipation of better performance, its share price has already run up a lot and it now has a P/E of almost 50 times. Unless there is a really big improvement in its earnings in the next update, I think this is a bit too high. Still, I think that as a cyclical stock its financials are likely to improve and its share price is more likely to rise than not. In this case too, for that reason, I would buy it in 2022 but on any dip that makes it more attractive from a valuation perspective. In the meantime I will focus on cheaper stocks.
Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended InterContinental Hotels Group and Smith & Nephew. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
