Last fall, we compiled a group of 10 core stocks for your portfolio. My contribution was Johnson & Johnson, the so-called "health-care mutual fund."
Since then, J&J completed a brutal fourth quarter, as a 15% sales plunge in its consumer-products division led to a 5.5% sales drop overall. Meanwhile, in a booming market, its stock price is a smidge lower than when I recommended it. That's not what we expect from a core stock!
Before I explain why this happened and give you my current thoughts, here's a quick snapshot of the company:
| Company | Johnson & Johnson (NYSE: JNJ) |
| What it does | J&J is a major player all over the health-care space, from consumer products to prescription drugs to medical devices. |
| Recent Price | $60.60 |
| Market Cap | $166.6 billion |
| Trailing P/E Ratio | 12.7 |
| Return on Equity, Last 12 Months | 24.7% |
Source: Capital IQ, a division of Standard & Poor's.
Why this happened
We saw a nice price for Johnson & Johnson back in the fall for the same reason that it's been muddling through recently: The company's plagued by product recalls. From its consumer products to the artificial hips in its medical-devices division, it feels like a new recall gets announced every week.
While these recalls are troubling, and well worth keeping an eye on, I'm still sticking with J&J.
Why it's still a core stock
A core stock is first and foremost a great company, proven over many market cycles and challenges. And any true core stock will still be relevant 10 years from now.
There are actually quite a few of these companies in the consumer-products and health-care fields that J&J plays in. We could argue about the strength of R&D pipelines in health care, but in consumer products, Procter & Gamble (NYSE: PG) and Kimberly Clark (NYSE: KMB) spring immediately to mind. Delving deeper into your house's cabinets, Colgate-Palmolive, Clorox, and Church & Dwight also qualify. They meet each of the criteria above, and all of them are dividend payers with reasonable balance sheets.
Besides Johnson & Johnson's solid 3.5% dividend yield, its net cash position, and its AAA credit rating, why Johnson & Johnson over these other companies? Frankly, it's selling for an unbeatable price.
The key to buying core stocks is waiting to buy them a good prices. Even after factoring in the cash it's spent on acquisitions, J&J is trading at an enterprise-value-to-free-cash-flow ratio of just less than 11. And looking backwards, it's clear J&J's cash flow power isn't a fluke.
Take this stock and call me in the morning
Let's be clear. If Johnson & Johnson didn't have its recall woes, its stock still wouldn't thrash a hot market. In fact, it's very likely to trail the market in good times. But the steady reliability of J&J stock will comfort the core of your portfolio when the market gets a boo-boo. Especially when your buy-in price is right.
