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Hip Priest! (Or why I am warming up to Smith & Nephew)

By Chris Bailey | Thursday 8 February 2018


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.


Of course the title is a nod to the sad passing of music legend Mark E Smith a couple of weeks ago...but given the demographic of readers on this website I expect many of you are familiar with his 1981 penned epic which so famously was also used in The Silence of the Lambs. As one wag put it in a YouTube comment 'i find its (sic) the perfect song to play when you're being chased through your dungeon-like basement by an FBI special agent'. Absolutely! Anyhow...back to finance and investments.

There are some trends an ageing population has got to deal with and failing hips and knees and the need for any associated surgery and wound management is one of them. This is why throughout my investment facing career stocks like Smith & Nephew (SN.) have been loved-up by investors looking to lock into longer-term thematic trends. There was a time when I absolutely agreed with this but I lost my faith when growth dried up and hope seemed to overtake reality.

I kicked myself a few months ago when newspaper reports highlighted that famed activist investor Elliott Capital Management was sniffing around. If I ran an activist fund with a larger cap focus Smith & Nephew would be just the right sort of company to look at: good products and market share, solid balance sheet...and it has lost its way a little.

Today's full year numbers are I think the start of the management's push back. I am not going to convince you to pay up for low single digit full year revenue and profit growth in 2017 but - as always with investments - it is where the company is going that matters more. And ignoring the Trump tax cut benefits, I am warming up to what I see: higher margins, new product innovation backed up by academic study and conclusions, continued good cash flow and a double digit rise in the dividend (admittedly sub 2% only if you asking). I always like it when a company is a bit on the back foot because - as we saw most notably with Unilever (ULVR) last year and the bid from Kraft - it is amazing what savings and initiatives suddenly emerge.

In an ideal world the share would be kicking around at that big c. 1150p support level but given that 2018 is going to be all about the gyrations of the stock market rather than the mindless 'buy and hold' you may well get a chance. I don't want to have to use any of its products for a suitably long period but as for the shares the name is near the top of my FTSE-100 generalised puke buy list.


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