I’ve generally avoided big-name US stocks because I thought they were too expensive. But now, for the first time in my career, I’m finding value in some big US stocks… particularly in one sector.
Stocks today (as measured by the big indexes) are currently cheaper than they were 11 years ago, back in 1999. The important thing is this: While the share prices are lower, many companies have grown dramatically.
Consider the case of Johnson & Johnson (NYSE: JNJ). Its share price is in the $50s today, like it was at its highs in 1999. But since then, the business has grown dramatically. Now, you get a whole lot more business for your investment buck.
Warren Buffett – the world’s most successful investor – likes to measure the growth in his business by its growth in book value. By that measure, Johnson & Johnson is 70% cheaper today than it was in 1999 because of its growth. Back then, J&J traded for ten times book value. It trades at three times book value today.
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J&J has rarely been this cheap. And history tells us we really want to own it when it gets cheap!
J&J dipped below four times book value in early 1994. The share price soared 150% within two years. You have to go back a quarter of a century to find it as cheap as it is today. And of course, the stock soared after that as well: Shares doubled in less than two years and tripled in just over three years.
It’s also cheap when you look at earnings. J&J is trading at 12 times earnings right now. Shares have only been this cheap a couple times in history. In all instances, you could have made a heck of a lot of money.
• J&J fell to 11.9 times earnings in March 1980. The stock doubled in less than three years.
• In June ’84, it traded down to 10.9 times earnings. The stock nearly tripled over the next three years.
• Its next big valuation low was April 1994, at a price to earnings of 13.8. The stock tripled in three years.
It seems like investors have given up on drug companies like J&J. Whether it’s worries about patent expirations, dry drug ‘pipelines’, lawsuits, or just simply boredom after a decade of no return, shareholders have thrown in the towel.
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But J&J isn’t going away. I don’t know about at your house, but around my house we are big J&J customers for life – without even realising it. We use Listerine. We have for decades. We aren’t changing. We use Band-Aids. We have for decades. And we aren’t changing. We use Neosporin… the list goes on, longer than you can imagine. These are all Johnson & Johnson brands.
And then there are the drugs, including Tylenol, Motrin, Sudafed, Benadryl, and more. J&J has probably infiltrated our house more than any other company in America. These J&J brands are insulated from economic downturns. We will continue to use these products at home indefinitely.
And these are just a few examples of brands you recognise from J&J. The company does a lot more than Band-Aids and Tylenol. Importantly, it holds the No. 1 or No. 2 rank in 70% of its products.
Despite all of this, the stock is dirt-cheap. I was talking about this with my colleague Frank Curzio. He said, “I can’t think of one risk that’s not already priced into these stocks … and at some price, everything is a buy.” I think “some price” is today’s price.
Keep in mind, Johnson & Johnson is a no-debt business. (With $18 billion in cash, it has more cash than debt.) It has an incredible collection of brands, which should insulate it from economic downturns. It has one of the best drug pipelines in the industry: It’s developing drugs for pain, arthritis, and heart disease. Finally, the company knows its stock is cheap. It has bought back $9 billion worth of its own stock since 2007, and will likely buy back $1 billion more over the rest of this year.
Most big pharmaceutical companies are at record cheap values – by far. Many are significantly cheaper than Johnson & Johnson. History shows when these stocks get this cheap, triple-digit gains follow.
Big drug companies are record cheap, investors have given up on them, and we might be seeing a glimmer of an uptrend.
A safe, simple way to play the big drug companies is through the iShares US Health Care ETF (NYSE: IYH). Its largest holding, incidentally, is Johnson & Johnson.
I’m almost never interested in Big Pharma, but I’m buying now. It’s just too cheap to ignore.
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