Monday, March 26, 2007

Almost Time to Buy

Johnson and Johnson (JNJ) is continuing to trade lower. As I've written before, this is one of the best companies in America. They operate in three separate branches to provide themselves a diversified group of businesses. 1)Drugs, 2)Medical Devices, and 3) Consumer Products.

They recently closed the acquisition of Pfizer's (PFE) consumer products division. This will add to their market share in an industry that always does well.

A couple of reasons for the drop in share price. 1) All pharma companies are getting hit right now. There has been the concern since last fall that the Democrats will go after the big drug companies. I've written lately about the opportunity in the drug company Amgen (AMGN) as well. I see this as a short term concern. Health care prices aren't going to be coming down soon. A very important factor for these companies is their pipeline of future drugs and products, and how much are they spending of research and development. Both of these companies are perennial leaders in R&D. 2) There has been some negative news coming out about the stents used for heart patients. This has been an area where investors had been hopeful for J&J to grow, but hasn't produced much thus far.

The bottom line is that this is one of the best companies in the world. They pay a nice (1.50) dividend. They are consistently buying back lots of stock (5.5 bil in 2006). The key to owning these companies is buying them when they fall out of favor or are forgotten about, which would be right now. It may take a little while for the recovery, but you can collect the dividend while waiting, and it is a company with very limited risk.

As a final note, this is a classic example of value investing. Warren Buffett has been buying this company in the last few quarters, and I'm sure he's picking up more shares during this drop. Jim Cramer on the other hand, has been selling his stake in J&J for a loss. I think this stock is a good buy.

Good Luck!


Zachary said...

I have thought about throwing some individual stocks into a small portion of my portfolio. J&J is high on the list of stocks I've been considering.

Michael said...

It is one of the best out there. The P/E multiple is pretty low considering where it has been at historically. Their profit margins are higher than their competitors and this is trading cheaper. Good luck!