A Hot 5-Star Stock Idea: Johnson & Johnson

There's an old -- and very appropriate -- investing saw that says, "Tips are for waiters." So I'm not going to bother giving you a stock tip. I do, however, have a stock idea for you.

What's the difference? Well, a stock tip is generally a hush-hush, wink-wink affair where the tipper expects the tip-ee to run out and buy the stock based on the tip alone. A stock idea, on the other hand, is a good starting point, but is in need of further research before it becomes a fully baked investment thesis.

So let's cut the jibber-jabber and get right to today's idea, Johnson & Johnson (NYSE: JNJ  ) . The Motley Fool's CAPS community has overwhelmingly recommended this stock, with more than 11,000 members giving it an outperform rating versus just 410 who have rated it an underperformer.

To get a better look at how J&J stacks up, let's take a look at how it compares to other companies in the health-care industry:

Company

TTM Net Profit Margin

TTM Return on Equity

Price-to-Earnings Ratio

CAPS Rating
(out of 5)

Johnson & Johnson

20.5%

28.8%

12.2

*****

Novartis (NYSE: NVS  )

18.5%

16.3%

11.6

*****

Abbott Laboratories (NYSE: ABT  )

18.3%

29.1%

13.4

****

Merck (NYSE: MRK  )

25.3%

30.3%

9.4

****

Pfizer (NYSE: PFE  )

17.0%

12.5%

12.3

****

Source: CAPS, Yahoo! Finance, and Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

As you can see from the chart above, CAPS members like a bunch of the big-cap pharma names. Not only are they all relatively cheap on a P/E basis, but they sport high profit margins and enviable returns on shareholder equity. J&J stacks up well against the rest of the group, with profit margin and ROE among the best, a P/E that falls in the middle of the pack, and, of course, a strong vote of confidence from the CAPS community (five stars).

I have given J&J's stock a thumbs-up in my own CAPS portfolio, but I'm far from alone. CAPS All-Star LatePlay gave a thumbs-up late last month, noting J&J's "excellent fundamentals" and "good yield." Meanwhile, DemonDoug, one of the top-performing members of the CAPS community, has been bullish since October, when he pitched:

This is one of your best long-term bets for the next 10 years. A MUST buy under 60/share, will pay steady dividends that will continue to increase, they produce products in the real economy that are needed, from drugs to bandaids to shampoo to prosthetic implants, JNJ is a must own for any long-term value investor, again, under 60/share.

So what do you think? Is this an idea worth pursuing, or is Johnson & Johnson an overrated stock? Head over to CAPS and let the 135,000-member community know what you think. If you're not sold on J&J but want to take advantage of the collective intelligence of the CAPS community, fans of J&J have also been bullish on Apple (Nasdaq: AAPL  ) and General Electric (NYSE: GE  ) .

Further Foolishness:

Apple is a Motley Fool Stock Advisor recommendation. Pfizer is a Motley Fool Inside Value pick. Johnson & Johnson is a Motley Fool Income Investor recommendation. Novartis AG is a Motley Fool Global Gains pick. Try any of our Foolish newsletters today, free for 30 days

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool. The Fool's disclosure policy is as cool as a mint julep.


Read/Post Comments (3) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 10, 2009, at 1:19 AM, jhh3000 wrote:

    From my intuition, JNJ and other high-cap value stocks will not fare too well in the coming recovery. Yes, they will go up. But people typically purchase these types of mega stocks to "wade out" a recession. So I think these stocks will be less appealing once we begin to move out of the recession. I've sold all my shares of JNJ and moved that money into more risky oil & energy stocks, all small cap, all extremely risky but with extreme growth potential.

    Then again, I've only been investing for less than a year, so this is coming from a novice...

  • Report this Comment On June 10, 2009, at 10:31 AM, chopchop0 wrote:

    While I certainly have been plowing money into oil and energy like the above poster, I still have bought some JNJ cheap (<$48) to average my position down to $56 or so.

    JNJ is a well-diversified company with a solid balance sheet and a good long-term core-holding to supplement the more sexy growth/commodity stocks.

  • Report this Comment On June 10, 2009, at 9:32 PM, ledrose34 wrote:

    I completely agree with what you are saying, My main company I invest into is JNJ.

    Josh,

    www.thoughtsedge.com

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