ALEXANDRIA, VA (Dec. 7, 1999) -- Shares of healthcare behemoth Johnson & Johnson (NYSE: JNJ) have slipped like butter down a warm skillet the past week, bringing our beloved, genuine, real-world Drip Port with it. What's the scoop? We're here today to dish it out, like ice cream at an ice cream sundae buffet -- and, yes, we'll include a cherry on top.
Johnson & Johnson began the year at $83 7/8 per share. At recent prices, it has gained about 15.5% this year before dividends are considered, which is in line with the S&P 500. For most of the year, the stock has led its pharmaceutical peers -- many of which have suffered flat performances -- and the S&P 500. One year is a short time period to measure, so let's measure an even shorter time period (tricked ya there, didn't I?). Let's measure one week. A mere week ago, J&J traded at $105, so it has dropped nearly 8% since (before today), shedding $10.7 billion in market value in the process.
Why the slide, especially when the stock market has been rising over the same period? To investigate, we sent former cub reporter Brian Graney (TMF Panic) to New Jersey to have a face-to-face with Johnson & Johnson. However, Brian was last spotted in Atlantic City, doubling down on both his gin and tonic and his hand of 21. He busted, pulling a face card. When Brian returns, he'll be sent to the Fool's Personal Finance area to learn about debt and bad bets, which include the lottery, casinos, horse gambling, and three-legged dogs at the dog track.
Without Brian to rely on, we -- being Foolish investors anyway -- can simply search for facts online regarding our beloved company. Doing so, we see that the "story of the slide" at J&J began on November 30, 1999. It was on that infamous day that an analyst downgraded the entire pharmaceutical sector due to its political concerns. The analyst fears that during the next year the political environment will create volatility in drug stocks. Why? Because healthcare will be a large topic in the run for the presidency. Presidential hopeful Bill Bradley may go head-to-head with George W. Bush. Or Al Gore. Or Donald Trump. Or Madonna. Who knows.
Foolish Lesson Number One Today: Don't let large, general, and unfocused concerns impact how you invest in a single company. In the early 1990s, political concerns knocked companies like Merck (NYSE: MRK) and Johnson & Johnson down to valuation multiples not seen in several years. This was a great time to buy -- precisely when everyone else was selling due to general, unfocused concerns.
That lesson out of the way, the next piece of news that melted J&J's stock is more relevant. One of Johnson & Johnson's overseas partners, Raisio of Finland, reported that its anti-cholesterol food agent, Benecol, isn't selling as well as hoped for in the good old United States of America. Working with Raisio, Johnson & Johnson is marketing the food additive in a line of cholesterol-lowering margarine, salad dressing, and snack bars. In May, J&J launched a hefty $100 million advertising campaign to promote these new medicinal foods, but the campaign was discontinued.
Instead of marketing directly to consumers, the focus now turns to doctors who can inform patients about Benecol. Although this is obviously good for patients -- and J&J is now convinced that doctors are the best conduit in selling the product -- general consumer-wide sales of the product were the initial hope. Why hasn't the healthy stuff flown off shelves? One of the problems may be price. Benecol margarine, for example, can cost four times more than cheap-o margarine. Apparently, consumers aren't ready to spend that much moola to improve their cholesterol. After all, for $5, you can get four bags of potato chips. (Yum!)
The admittance by Raisio that Benecol is lagging hopes in the United States is a small blow to J&J, even though the company is reportedly pleased with sales so far. Analysts predicted that sales of Benecol products would reach $80 million to $100 million in their first full year, but that ain't likely now. This sales estimate is very small in light of J&J's $26 billion in total annual sales (and even smaller in the earnings pool), but it ain't quite chicken feed, and the longer-term potential was more relevant. That said, the disappointment of Benecol probably ain't worth dropping $10 billion in market value, either.
Foolish Lesson Number Two Today: Remember that stocks sometimes rise more than merited, especially near term, due to anticipation of a new product (especially one that represents a new way of doing things, like Benecol). Next, remember that stocks often fall too much following a disappointment, even a disappointment from a minor product. What to do? Keep an eye on the big picture for your company, not the smaller, often newer products alone.
Vince wrote about Benecol in two parts this summer: part one, part two. My bet is that J&J will find enough ways to market this healthy additive over the years to make it a satisfying success.
The final issue that may have driven J&J's stock lower was only found on our J&J message board. Fools are posting that concerns abound regarding inventory levels at hospitals. Supposedly, many clients have increased buying recently, of both pharmaceuticals and other products, to obtain better pricing. If true on a large enough scale, this stocking up of the inventory could result in temporarily lower sales later on -- a hiccup in sales flow. Finally, some hospitals are supposedly now waiting to order new things while focusing on Y2K issues. True or not, the lesson is...
Foolish Lesson Number Three Today: These are only short-term issues; therefore they're not relevant issues to true investors.
As stated in many posts on the J&J message board, the slip in Johnson & Johnson's price is beneficial to direct investors who want to buy more shares, while being meaningless to long-term investors who are focused on the company's valuation 10 years hence, when these days will be long forgotten.
