After several months and a new US President, it seems like the healthcare sector and in particular the pharmaceutical and biotech sector can’t seem to shake off the uncertainty surrounding their future; will there be new pricing laws, the repeal of Obamacare etc. etc.
While big drops like this usually frightens away the impatient and fearful investor or trader, we as value investors should look forward to such opportunities which don’t occur that often.
Johnson and Johnson has been one of the luckier ones being well diversified into many other daily products we use like shampoo, baby oils etc., it hasn’t endured a similar fall like other pure pharmaceutical and biotech companies like Gilead and Bristol Myers. However, it has finally fallen back to fair intrinsic value over the past half year.
The following is what’s making me want to add even more Johnson and Johnson stock to our long term investing portfolio.
Please note, I am both a long-term deep value investor as well as a medium-term trader who utilizes the combination of both fundamental, technical and macro analysis to form a view of every investment I make. Doing so I believe leads to low risk and superior market beating returns over the long run.
Fundamental Factors;
The Bad
Not much except the current uncertainty as a whole surrounding the entire healthcare sector and industry which JNJ is protected from due to its consumer product mix diversification.
The Good
Price is close to fair value within intrinsic valuation of $100-$110 (approx.).
Latest Return on Equity (ROE) of over 25%
Continued Earnings per share (EPS) growth over the past 5 years is expected
Long-term cash flow relative to reported profits is strong.
JNJ has a long term funding surplus.
Current cash balance exceeds its debt
Other Factors
For longer-term investments, I generally like to see who else is on-board with me and where the smart money has found its home.
In my opinion, actions always speak louder than words. JNJ is held by a lot of smart money managers.
Tweedy Browne – 10.59% of portfolio managed
Donald Yacktman – 6.31% of portfolio managed
Jeremy Grantham – 4.06% of portfolio managed
Samuel Isaly – 3.92% of portfolio managed
Jeff Auxier – 2.75% of portfolio managed
and many more holding well above 2%.
Conclusion
The recent 10% price fall of Johnson and Johnson in the past half year has brought the stock back to fair value for a wonderfully managed diversified pharmaceutical giant with plenty of smart money support.
The stock looks like it may have some more to fall, so to avoid catching the falling knife, we’ll wait for a buying momentum shift upwards before adding any more Johnson and Johnson for our long-term portfolio.
We should never be fearful when an opportunity like this exists. The most important part is to always position size accordingly and build a position and portfolio of the strongest businesses over time. Johnson and Johnson fits this criteria.
Also find out where 2017 is headed, the risk and the opportunities. Click here for details.
