Here’s why Smith & Nephew is one of the most expensive shares on the market

Here’s why Smith & Nephew is one of the most expensive shares on the market

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It has long been understood that cheap stocks have a tendency to outperform expensive stocks in the stock market. While this is not true every single year, over almost every 3-year cycle in the stock market, cheap (or value) stocks outperform. This phenomenon has created the cult of 'Value Investing' born of the writings of Benjamin Graham and the amazing success of its arch proponent Warren Buffett.

On an extremely long-term, multi-decade view, value is perhaps the only filter through which to think about stocks. Of course, with average investors holding stocks for less than a year, plenty of other factors come into play during that timeframe. Nevertheless, when we are researching a stock, we can’t ignore whether it is cheap or expensive.

According to Stockopedia’s calculations, Smith & Nephew (LON:SN.) is very expensive. Here's why.

Breaking down Smith & Nephew’s low Value Rank

One of the masters of value (and factor) investing is Jim O'Shaughnessy, the founder of O’Shaughnessy Asset Management (OSAM). In the 4th edition of his groundbreaking investment research tome What Works on Wall St, O’Shaughnessy shows that composite value factors based on a mix of metrics dramatically beat the market over a multi-decade period.

It was from this powerful insight that Stockopedia’s Value Rank was born. We can see it in action. Smith & Nephew has a:

  • Rolling price to book value of 26.4,
  • Rolling price to earnings ratio of 26.0,
  • Trailing twelve-month price to free cash flow of 27.3,
  • Rolling dividend yield of 1.08%, and a
  • Trailing twelve-month price to sales ratio of 4.04...

When compared to other stocks in the market, this makes for a Value Rank of just 17.


What does this mean for potential investors?

Some of the best quality stocks in the market have defensible models that can deliver high levels of shareholder returns over the long term. But there are no guarantees and it's important to do your own research. Indeed, we've identified some areas of concern with Smith & Nephew that you can find out about here.


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Smith & Nephew's StockRank™

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Smith & Nephew's StockRank™

With a StockRank of 55, Smith & Nephew is more attractive than 55% of the 7,586 stocks we cover in Europe, according to our proprietary ranking system.

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