Investing always involves a trade-off of risk and reward. That's especially obvious with investing in the stocks of companies developing coronavirus vaccines. These stocks hold the potential to soar on good news for their vaccine candidates and sink on bad news.
While every stock comes with some degree of risk, some are definitely a lot less dicey than others. What's the safest COVID vaccine stock of them all? I think the hands-down winner is Johnson & Johnson (JNJ -0.46%).
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The bluest blue chip in healthcare
What happens if Johnson & Johnson's late-stage coronavirus vaccine doesn't pan out? The company will march on, largely unphased. That wouldn't be the case for several of the smaller biotechs hoping to market their own COVID-19 vaccines.
Johnson & Johnson is undoubtedly the bluest of the blue chip stocks in the entire healthcare sector. The company has been in business since 1886 -- the same year the first patent for a gas-powered car was filed. J&J has survived and thrived through recessions, depressions, and world wars.
However, J&J isn't the oldest coronavirus vaccine maker -- that honor belongs to Pfizer, which was founded 27 years earlier. The company is the biggest, though, by far with a market cap of close to $400 billion.
A large market cap doesn't automatically make a stock a safe pick. But in J&J's case, its huge size reflects underlying strengths that make it safer than most stocks on the market. Johnson & Johnson operates multibillion-dollar businesses that make consumer health products, medical devices, and pharmaceuticals. It offers the widest diversification across the healthcare sector of any company. That diversification makes J&J less risky than most stocks.
The company's big size stems from its big revenue and earnings. J&J generated $82 billion in sales last year, with profits totaling more than $15 billion. The old adage that "it takes money to make money" is right. And J&J has plenty of money to continue making money.
A lot to like about J&J's COVID vaccine
Don't think, though, that Johnson & Johnson is just a stodgy big healthcare stock that won't be able to deliver solid growth. The company's COVID-19 vaccine candidate by itself should put that misconception to rest.
Other coronavirus vaccines are the center of attention right now. However, J&J should report interim efficacy results for its candidate, JNJ-78436735, early next year. If all goes well, the company could launch the vaccine in the U.S. and other major countries in the first quarter of 2021.
Bernstein analyst Ronny Gal thinks that J&J will generate sales totaling close to $3 billion next year from its COVID vaccine. There are a couple of things to keep in mind, though, that could boost sales over the long run.
First, J&J has committed to providing its coronavirus vaccine at cost during the pandemic. Once the pandemic is over, though, look for the company to raise its price enough to secure a solid profit. Second, JNJ-78436735 stands out among the leading COVID-19 vaccines in that it requires only a single dose. This could give J&J a significant competitive advantage if the vaccine's efficacy is comparable to its rivals.
An acceptable trade-off?
To be sure, there's a trade-off in buying a stock like Johnson & Johnson versus the stock of a smaller biotech with a promising coronavirus vaccine. J&J won't deliver the massive gains that some other stocks might. That's the downside of the risk-reward proposition of a relatively safe stock -- less risk is linked to a lower potential for reward.
Still, though, J&J has been the biggest millionaire maker among COVID vaccine stocks through the years, by far. As was the case in the fable of the tortoise and the hare, the victory often goes to the steady racer. Johnson & Johnson is about as steady as they come. For many investors, the safety that the stock provides will be an acceptable trade-off for smaller near-term gains.
