Johnson & Johnson (JNJ): Slow and steady ~ market folly

Friday, April 25, 2008

Johnson & Johnson (JNJ): Slow and steady

JNJ: Slow and steady
Posted 0 days ago on 4/24/08
JNJ: Buy, Target price: $72, Time Frame: 6 months

Johnson and Johnson operates in one of the few sectors of the economy that can do ok and thrive in a slowed growth or recessionary environment. As the old saying goes, slow and steady wins the race. This cliche summarizes Johnson & Johnson (JNJ) up quite nicely. This stock is nothing extravagant, not super volatile like some Chinese or tech stocks, and quite frankly, boring. This is your atypical run of the mill blue chip beast. That's right, JNJ won't add massive returns to your portfolio like some growth stocks, but it will deliver consistent returns, and that's what is so great about it. Johnson & Johnson (JNJ) researches and makes consumer staples, that's all there is to it. They have over 250 companies involved in the industries of pharmaceutical, medical devices, and consumer products. They make the goods you use on an everyday basis to stay healthy. Items in their arsenal include Tylenol, Band Aid, and Neutrogena. JNJ makes boring stuff you use everyday, and that's exactly why you should own the stock. JNJ is not a growth story, it is not a value story. JNJ is simply a survival story at this point. Look for this sector and this company in particular to help you weather the economic storm in your portfolio. Their products are all over and constantly used; they are necessities in any household. And for that exact reason you should own JNJ. And, if you haven't noticed, the stock has been performing quite nicely while numerous other stocks have struggled the past few months.

When times get tough and people start to see their income shrinking, they stick to the basics to survive, and JNJ provides just that. Johnson & Johnson performs well in any market, but performs even better in a recession. JNJ will still deliver the same consistent returns it always does. That is the main selling point of JNJ: consistency. You know what you're getting and you don't need to worry about the market environment. In an uncertain environment like we are in now, add consumer staples to the portfolio to a) diversify your portfolio and b) reduce your risk. If other sectors in your portfolio get hit hard, JNJ will stay strong and consistent. (Hence why you see it at a 52-week high while the rest of the market begins to tank). Now, the sector of consumer staples is pretty large and filled with some big names, so why JNJ? Well, the fundamentals explain the reason as to why I am selecting it as one of my main consumer staple plays to help reduce risk in your portfolio. This means that not only does JNJ protect you from short term uncertainty, it gives you a lot of upside in the stock for the long term. Take a look. JNJ has become slightly pricey at these levels, but that's completely acceptable as it's the premium you pay to protect yourself in a rough market. With a trailing PE of 16 and a forward PE of 14, JNJ is not unattractive though considering the environment we are in. And, not to mention, it has gotten cheaper on valuation when compared to last quarter because it is now trading at a lower PE. With operating margins of 25% and a return on equity of 24.6%, JNJ has a strong core business. These numbers allow them to have a 7.7% growth in quarterly revenue, despite the environment we are in. Again, JNJ is about consistency. Lastly, by a price to sales metric, JNJ is undervalued with a PS ratio of only 3.1 (anything under 5 is undervalued). Also, JNJ's price to book ratio is 4.47 which isn't bad at all either. So, you are barely paying a premium for the protection JNJ offers. Lastly, JNJ dominates in terms of quarterly earnings growth, seeing 39.8% growth year over year.

Institutional Ownership: Warren Buffett's Berkshire Hathaway has invested over $3 Billion in JNJ and owns over 53 million shares of JNJ. It makes up 5.4% of their portfolio. Buffett's track record speaks for itself, and I can definitely see why JNJ is one of his favorites. Looking at other major institutional owners reveals that all the other big dogs are there, such as Vangauard, Fidelity, and Barclays. When looking at things from a hedge fund ownership perspective, you will see that Renaissance Technologies holds 3.1% of its portfolio in JNJ (a $2 Billion investment). This hedge fund is often regarded as one of the top10 hedge funds out there. Now, there are many other big owners of JNJ, but these are the names that speak volumes. All these firms realize that JNJ has value and that it services a sector that will never go away. A look at analyst coverage reveals 7 strong buys, 2 moderate buys, and 5 holds. Not one negative recommendation. A look at the star ratings reveals that Bear Sterns and Raymond James rate JNJ 5 stars, while Bank of America, Goldman Sachs, and 4 other major investment banks all rate JNJ 4 stars. They all expect JNJ to easily outperform expectations with low risk.

Stay diversified and reduce the risk in your portfolio with JNJ.

JNJ: Buy, Target price: $72, Time Frame: 6 months


Anonymous said...

Johnson&Johnson is one of biggest health care company.JNJ have research and development as well as manufacturing and sales of different products. They served the health care field from a long period of time.Most of the prestigious shareholders like Warren Bufett is working forJohnson And Johnson. They return 5.60% average annual to its share holders.