Once a trusted brand and a mainstay of American businesses, pharmaceutical giant Johnson & Johnson (NYSE:JNJ) is not having a great year. Sure, you can point to the positive 3.5% year-to-date return of Johnson and Johnson stock. Although not much to write home about, it is still a profit. Nevertheless, that doesn’t tell the whole story.
Currently, Johnson and Johnson has two major headwinds that have investors rattled. First, the company faces multiple lawsuits regarding the raging opioid crisis. Last month, an Oklahoma judge determined that the company deliberately downplayed the health risks associated with opioids. At the same time, the judge accused the drug-maker of exaggerating the opioids’ benefits.
As InvestorPlace contributor Bret Kenwell pointed out recently, the case against Johnson and Johnson seems overly harsh. After all, Kenwell rightly notes that other pharmaceutical firms have played a much wider and therefore more devastating role. Unfortunately for stakeholders of JNJ stock, the courts have not favored the now embattled organization.
Even worse, the Oklahoma case provides a blueprint for the thousands of lawsuits involving the opioid crisis. That puts Johnson and Johnson stock and the broader healthcare industry under increased pressure.
The second major headwind impacting JNJ stock is the asbestos scandal. Earlier this year, a New York jury ordered the company to pay $300 million in punitive damages to Donna Olson and her husband. The couple claimed that Ms. Olson developed mesothelioma from JNJ’s talcum powder.
Although the collective damages are not insignificant, the real threat is to Johnson and Johnson’s reputation. With healthcare receiving more scrutiny and competition, this is the last thing management needs. Therefore, avoiding JNJ stock seems prudent.
Despite Ugliness, a Recovery Is Possible for Johnson and Johnson
Conservative or risk-adverse investors shouldn’t try to play games with JNJ stock. In terms of risk, the legal variable is one of the most difficult to predict. And we all know how much the markets hate uncertainty.
In terms of the public relations element, Johnson and Johnson stock must contend with another liability. As I mentioned in my last write-up for the pharmaceutical, people tend to remember corporate scandals for a long time. Not only that, JNJ was once one of the most trusted brands. It’s sad that allegedly, they nuked this image.
But as awful as these scandals look for JNJ stock, it’s probably not the end of the company. While consumers may not trust the brand in the interim, there’s also an argument that the scandals are known commodities. With JNJ competitor products, you’re taking a risk of the unknown: maybe the competing products are better or maybe they’re just as bad.
Moreover, a surprising number of companies have successfully fought back from scandals. Most notably in this sector, health investigators discovered that Merck’s (NYSE:MRK) arthritis drug Vioxx caused multiple heart attacks. That wasn’t all: those heart attacks led to 38,000 deaths.
As you might expect, a legal storm cascaded upon Merck, with management taking on 27,000 product liability cases individually. During the immediate blast radius of the controversy, MRK tumbled to multi-year lows.
You’d think that killing 38,000 people would cripple a company. But as you can see from MRK’s price chart, the pharmaceutical has recovered quite well.
Could the same thing happen for Johnson and Johnson stock? Certainly, it’s no guarantee. However, history shows us that you can’t pronounce JNJ dead until it’s truly over.
JNJ Stock Must Wait Through the Immediacy Bias
For now, though, JNJ stock must sit and wait out the market’s immediacy bias. What I mean here is that people tend to view immediate problems as more significant than prior ones.
As I demonstrated with Merck, this isn’t the first time that a pharmaceutical terribly and inexcusably erred. Sadly, it will not be the last. My point here is not to give JNJ a pass. Rather, it’s to approach shares rationally.
Yes, shares risk volatility as the legal environment ebbs and flows. But big companies like JNJ and Merck tend to weather the storm.
If you don’t mind tacking on some risk, a compelling upside opportunity exists in that a lot of the bad news has been baked in. Plus, you’re getting paid for your troubles with a decent dividend yield and diversified exposure to healthcare.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
