It’s hard to believe it’s been almost a year since I last wrote about Johnson & Johnson (NYSE:JNJ), the fourth-largest component by market capitalization in the Dow Jones Industrial Average. A year ago, my concerns about the company’s legal battles had me on the sidelines. JNJ stock is up 17% since.
Looking ahead to the next 12 months, is there anything investors should be concerned about that could trip-up Johnson & Johnson shares?
I haven’t spent much time following the pharmaceutical company in 2020. As such, I’ll lean on some of InvestorPlace’s finest contributors to give me a sense of which way the wind is blowing.
Hopefully, by the end, I’ll be able to decide if it’s a buy, sell, or hold.
JNJ Stock Is a Buy
According to Portfolio Grader, Louis Navellier gives Johnson & Johnson a B rating and calls it a buy. That’s good to know.
I’d forgotten that I discussed JNJ stock in 2020. On Aug. 24, InvestorPlace ran a piece that I originally wrote in May that recommended 20 stocks to buy if you’re betting on America. The company’s medical devices and pharmaceutical divisions had a lot to do with my selecting it.
InvestorPlace’s William Write recently wrote about Johnson & Johnson’s $6.5 billion acquisition of Momenta Pharmaceuticals (NASDAQ:MNTA). Momenta’s stock gained 69% on the news, primarily because Johnson & Johnson is paying a 70% premium to Momenta’s Aug. 18 closing price.
This isn’t a big deal for the company. Johnson & Johnson has a 12-month trailing free cash flow of $17.4 billion. Its net debt of $11.3 billion is just 2.8% of its market cap. Momenta is a rounding error.
According to a recent article in Forbes, immunology accounts for one-third of the company’s $21.9 billion in pharmaceutical sales through the first six months of fiscal 20020. Momenta brings several products to the table, including Nipocalimab, a therapeutic used to treat autoimmune disorders. Combine that with Johnson & Johnson’s in-house products, which include Remicade, Stelara, Simponi, and Tremfya, and investors ought to like the deal.
It’s a bit like getting a late-round draft pick that turns into a 50-goal scorer or 1,000-yard rusher. JNJ management will take Momenta and turn it into a powerhouse in the immunology marketplace.
Johnson & Johnson reported better-than-expected Q2 2020 earnings in July. It also raised its full-year guidance to minimum adjusted earnings per share of $7.75, up a quarter from guidance earlier in the year.
There’s nothing I can see that should stop you from buying JNJ stock.
It’s a Sell
Of the 17 analysts covering JNJ, only one rate it “underweight” or “sell” while 10 believes it’s a “buy,” two more have it “overweight,” and four rate it a “hold.” The average target price of $164.87 suggests there’s an 8% upside over the next 12 months.
The analysts are confident, but not that confident.
As for the legal issues that kept me on the sidelines last year, The Motley Fool contributor David Jagielski recently wondered if its legal problems would bankrupt the company.
“Last month, J&J learned that it would have to pay $2.1 billion to women who said they contracted ovarian cancer as a result of using the company’s talc-based products. There are two things to concern investors here,” Jagielski wrote on July 2.
“The first is that this relates to a verdict from 2018 that involved just 22 women. The second is that the amount was reduced upon appeal – the initial verdict was for J&J to pay a staggering $4.7 billion. The $2.1-billion charge is less than half of that total, partly because the Missouri court did not include some out-of-state plaintiffs.”
Jagielski goes on to suggest that there are safer long-term dividend plays available given the lawsuits the company faces aren’t going away. Further, he reminds investors that Johnson & Johnson is no longer the kind of stock that you can stick in a drawer and forget about for a decade or more.
I said it was too risky last September. I don’t think anything’s changed for the better on the legal front, so it’s not a stock I would be taking for granted.
If You Own JNJ, Hang On to It
Over the past year, the ETF I recommended in my September 2019 article – Health Care SPDR (NYSEARCA:XLV) – has a total return of 22.1% through Aug. 26 compared to 22.2% for Johnson & Johnson.
If you own JNJ stock, I would continue to hold it, but pay attention to any trouble brewing on the legal front. Do NOT be afraid to pull the trigger on selling it on more bad news.
If you don’t own JNJ, but want to, I continue to see XLV as the better risk-adjusted buy at this point.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
