Buy This If You Like Johnson & Johnson Stock But Hate the Lawsuits  


At the end of August, Johnson & Johnson (NYSE:JNJ) was ordered by Oklahoma judge Thad Balkman to pay $572 million for its role in the state’s opioid crisis. Since that Aug. 26 ruling, JNJ stock has actually moved a couple of dollars higher. 

JNJ Stock Is Undervalued, but Not Compelling Given These Headwinds

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But the legal battles resulting from the opioid crisis are just getting started. Johnson & Johnson will appeal this decision, but the reality is that it will have to pay billions of dollar of legal fees, putting a damper on JNJ stock. 

One only needs to look at the bankruptcy filing by OxyContin maker Purdue Pharma to know any company that sold these highly addictive drugs is in trouble. 

Purdue has been spending more than $250 million annually on legal fees and other professional fees just to fight the various lawsuits against it. And while bankruptcy protection has effectively frozen all litigation against the company, many of Purdue’s plaintiffs continue to seek their days in court. 

Another InvestorPlace columnist, Larry Ramer, recently went as far as suggesting investors ought to short JNJ stock because of the legal threats it currently faces. 

Let’s say the company has to pay, in total, $150 billion as a result of the talcum and opioid suits. Let’s also assume that insurance pays half of that total, leaving the company with a total liability of $75 billion,” Ramer wrote in a column published on Aug. 30. 

If this were to come to pass, JNJ’s debt would increase three-fold. Worse, its reputation and its ability to attract customers would take a hit. 

At the end of the day, JNJ, which currently has the largest market cap of any of the drug stocks in the S&P 500, is unlikely to go bankrupt as a result of its legal troubles. 

However, it is likely to take a beating as the civil court judgments start piling up on both the talc and opioid front. 

If you like Johnson & Johnson stock, but hate the lawsuits, I’d buy The Health Care SPDR (NYSEARCA:XLV) ETF to ride out the storm.

The Lesser of Two Evils

One of the great things about ETFs is they allow small investors to gain exposure to important industries and sectors through a bucket of stocks, rather than just buying one or two equities. 

Of course, that cuts both ways. If you invest in an ETF with 100 equally-weighted positions, a stock that goes on a big run doesn’t make much of a dent in the ETF’s performance. However, the same holds true if a stock goes in the other direction. 

Ideally, I would buy an ETF whose holdings of JNJ made up of 5%-7% of its portfolio. I’d also be looking for a fund with a management expense ratio of less than 0.25%, total assets of at least $1 billion, and fewer than 100 holdings. 

The Health Care SPDR does the best job of meeting all of the criteria listed above. 

First, and very importantly for believers in JNJ stock, it has a JNJ weighting of 10.10%, making it the number one holding of the $17.1 billion fund. Johnson & Johnson is the largest of XLV’s 62 holdings; its top ten holdings account for 50.2% of the overall portfolio.  

XLV is big enough in terms of assets, has more than 5% of its assets invested in JNJ, has fewer than 100 total holdings, and most importantly, it has a management expense ratio of 0.13%, making it a very inexpensive way to protect against large losses while still gaining exposure to one of America’s most iconic drug companies.    

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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