How the Dow's Pharma Stocks Helped Boost Markets Friday

Merck and Johnson & Johnson both pushed higher, helping the Dow recover from Thursday's weakness.

Jul 18, 2014 at 9:04PM

The Dow Jones Industrials (DJINDICES:^DJI) closed the week on a high note, rising 123 points Friday, and regaining most of the ground the Dow lost on Thursday. Investors decided that they had overreacted to news that a commercial airliner was shot down over Ukraine, and even though geopolitical risk remains in the forefront, favorable earnings and encouraging economic conditions continue to buoy the stock market higher. Moreover, Merck (NYSE:MRK) and Johnson & Johnson (NYSE:JNJ) both had good gains today, as investors look to the pharmaceutical sector as a potential growth industry despite its reputation as a solid income-producing business.

Source: Johnson & Johnson.

Johnson & Johnson's gains of nearly 1.5% led the Dow higher. Johnson & Johnson has a wide range of businesses, including its consumer over-the-counter products and its medical device unit; but pharmaceuticals have been its largest source of growth in recent years, and is now the largest segment under J&J's corporate umbrella. Even as Johnson & Johnson has to worry about the loss of patent protection on some of its older treatments, newer drugs, like psoriasis-fighter Stelara and anti-coagulant Xarelto, have picked up the slack with extraordinary sales growth recently.

Mrk Vaccine

Source: Merck.

Merck also rose, picking up 1.25%. Unlike Johnson & Johnson, Merck has been more active in focusing on pharmaceuticals, selling its consumer unit to Bayer for $14 billion, and contemplating other strategic moves to target greater growth in its pharma segment. With ample cash on hand, Merck can look at making acquisitions of its own, potentially boosting its pipeline prospects without the uncertainty of developing new drugs from scratch.

Yet, the overarching factor that's likely behind gains in Johnson & Johnson and Merck is rival Abbvie and news today of its acquisition of Shire. A rash of proposed deals in the pharmaceutical space have centered on the desirability for U.S. companies of finding large acquisition targets overseas in areas with more favorable corporate taxation. Finding a target large enough to make a successful tax inversion possible would be a big challenge for Merck or Johnson & Johnson, and the potential political fallout could be devastating to the Dow components. Nevertheless, with billions in taxes at stake, you can expect the trend toward tax-inversion transactions to continue.

Pharmaceutical companies, both within the Dow Jones Industrials and outside the Dow, are finally starting to grow again after dealing in some cases with devastating patent-cliff issues. As long as big pharma stocks don't overpay for acquisitions in an environment in which Fed Chair Janet Yellen specifically called out biotech stocks as having stretched valuations, the prospects for Merck, Johnson & Johnson, and other major pharma companies continue to look favorable.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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