I've been getting bombarded all night with questions about Johnson & Johnson (JNJ), which we bought for Action Alerts PLUS Tuesday, and whether it's too expensive to buy up here. People really think we are off our minds scooping some up after the run this stock has had.
Frankly, the answer is no, not at all. In fact, J&J is one of the few of these old growth stocks that isn't too expensive. That's because the company has under-earned for years under the empty-suited William Weldon, the former CEO -- who, while loved by all, produced nothing of lasting value at Johnson & Johnson except lawsuits as far as the eye can see.
The new executive, Alex Gorsky, has carte blanche to clean up the company, to take out the layers of fat that we all know exist or to split up J&J into multiple businesses, including slower-growth health and beauty, faster-growth pharma and pretty good growth devices. The values that could be unlocked here are legion.
But that's not the point of what people are thinking about when they blanch at paying these prices. They are thinking that we have companies in the food business, in the drug business and in the health-and-beauty business that are now selling at triple their current growth rate -- as is the case with Johnson & Johnson. They're thinking that, if J&J has no possibility of being broken up -- or, alas, given all of the recalls, let's just say "reformed" -- it indeed doesn't deserve to sell at these prices.
But, as they say in Unforgiven, "deserves" has nothing to do with metaphors, or with the price-to-earnings ratio of Johnson & Johnson or any of the other rocket ships, they be Hershey (HSY) or Ely Lilly (LLY) or Colgate (CL) or Clorox (CLX).
Yes, a handful of tech stocks may have captured the public's fancy, or anger. But let me tell you that, for my friends who are portfolio managers, all they can talk about are the newfound ranges for these types of stocks. At any other time, ever, no one would pay these prices for these slow rates of growth.
I hear all sorts of reasons to explain why they are going higher. There's the need for dividend -- and, like J&J, they still have a meaningful one vs. bonds, at 3%. There's the need to have stable growth in a world where Europe's shooting itself in the foot, if not the head, and China may be faltering once again. There's the desire to be in a name with AAA balance-sheet equity, which most certainly describes J&J. There's the possibility of a developing equity shortage in some of these names because they have bought back so much stock. Then there's the tax-advantaged nature of stocks like J&J, because ordinary income rates have gone up so much more than dividend and capital-gains rates.
Perhaps all of these, combined, have allowed buyers to take these stocks up much more than they traditionally have done. Plus, even as it is never smart to sell a stock short on the basis of valuation, many hedge funds have been betting against these stocks because the quarters are not supposed to be that strong, with no real revenue growth and possible guide-downs because of a strong dollar.
Alas, the companies don't report for a few more weeks, and in the interim the buyers just won't quit.
So now the search is on for the stocks in these sectors that still can make something of themselves, or those that could be taken over, à la Heinz (HNZ). To just own some that have moved up and up is to risk a sudden decline, but it is fair to say that each decline has just been met with more buying.
It is a once-in-a-lifetime move, breathtaking in its relentlessness, and every single time I have tried to call the top it has confounded me. So make your peace, find your J&Js and go forward.