|
Published: June 25, 2010
Since starting my True Wealth
newsletter in 2001, I've avoided buying big U.S. stocks.
I've avoided big-name stocks because I thought they were too
expensive. But now, for the first time in my career, I'm finding
value in some big U.S. stocks… particularly in one sector.
Look, 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 10
times book value. It trades at three times book value today.
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-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... How the process
works:
- 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.
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 realizing 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 recognize 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, who writes the
super-exclusive Phase 1 Investor advisory. 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.
In True Wealth, I look for sectors that are cheap,
hated/ignored, and just starting an uptrend.
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 U.S. 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.
-- Dr. Steve Sjuggerud
Editor
Daily Wealth
|
