Drug stocks have become persona non grata for most investors over the last 7 years, as a long list of blockbuster drugs have gone off patents with no replacements. Few pure drug companies are anywhere near their price levels of early 2000.
Johnson and Johnson (JNJ) is one of the few drug-related stocks that has been able to achieve price gains during this time. The reason is simple. In addition to JNJ's pharmaceutical business, it has a broad portfolio of products in such diverse areas as consumer goods, orthopedic implants, and stints. Even in their drug business, they have focused their research in areas where they have little competition, avoiding the "me too" approach that most of the major drug companies have employed.
The Dividend Valuation Chart at the right shows that JNJ has made choppy gains over the past 7 years and is modestly undervalued at its current price. Projecting my estimates for JNJ's dividend growth and interest rates ahead one year, as shown on the black striped bar, the stock may be as much as 20% undervalued.
However, the most important quality that JNJ possesses is that it has broken free of most other major drug-related stocks and it, and perhaps Abbott Labs, are now on a very short list of what might be considered "safe" healthcare stocks. For such a big stock market sector as healthcare to have so few safe stocks, would seem to mean that JNJ is likely to gain weighting in many investment manager's portfolios.
JNJ is a very good story in an industry sector with a lot of bad stories. The relative performance might prove interesting over the next couple of years.