In the competitive spirit of college basketball's annual championship tournament, The Motley Fool brings you Stock Madness 2007! Our writers are making head-to-head arguments for their chosen stocks (but not necessarily investment recommendations -- this is, after all, a game), and you'll pick the winners with your article recommendations and Motley Fool CAPS ratings. Who will win the right to cut down the net? Let's tip things off and find out!
Over the past 100 years or so, a lot of famous companies have come and gone -- Enron, eToys, and Guantanamo Sugar, to name a few. Obviously, it's not easy for companies to stand the test of time.
So what's the secret to long-term success?
- Constant innovation
- Strong management
- A diversified product line
Think about some of the most successful companies of the past century: Coca-Cola, Altria, Procter & Gamble, etc. Each has satisfied these criteria and has posted strong long-term gains for shareholders.
Another name that deserves inclusion in this group is Johnson & Johnson (NYSE:JNJ). It's been a part of the American landscape since 1885, and one of the market's best investments over the past 35 years. Since March 1972, JNJ shares have returned 12% on average, turning a $1,000 investment into $52,800 today.
But enough about the past. Let's look into JNJ's future, using the aforementioned criteria.
Constant innovation
JNJ has learned that "if you can't beat 'em, buy 'em," as we saw with its purchase of Pfizer's (NYSE:PFE) consumer health care department last year. But despite the $4 billion in cash on its balance sheet, JNJ is quite prudent about the price it pays for acquisitions. As TMFOpie wrote on Motley Fool CAPS this past July, "They are not afraid to go after acquisitions in [the medical devices business], and are even less afraid to not pay outrageous multiples (e.g. Guidant)."
As you might recall, Guidant was eventually purchased by Boston Scientific (NYSE:BSX) at a very substantial premium.
Strong management
In 2007, Fortune voted JNJ America's most admired pharmaceutical company. It led the industry in the categories of social responsibility, quality of management, financial soundness, long-term investment, and use of corporate assets. Moreover, JNJ consistently posts ROE near 30% and operating margins of 25%. JNJ also pays a healthy dividend, which has grown 15% per year on average over the past 10 years, roughly in line with earnings growth during this time. This shows me that management knows what its shareholders want (growth and income) and is ready to share the wealth.
Diversified product line
JNJ has a tremendous product lineup, ranging from health-care products (Band-Aid, Neosporin, Aveeno) to medical devices to diagnostic equipment to pharmaceuticals. With diverse revenue streams and a strong position in the health-care industry, JNJ is in a great position to thrive in any market condition.
Foolish bottom line
Does all this mean JNJ will outperform the market going forward? Investors participating in Motley Fool CAPS, our new investing community, sure think so. Fully 96% of the 3,250 investors who have rated JNJ have picked it to outperform the S&P 500. If that's not enough to make you sit up and take notice, I'm not sure what is.
I'd like to tell you more about why JNJ could be a great investment going forward, but in order for me to do so, JNJ needs your votes to move onto the next round of Stock Madness 2007. Simply follow this link to vote JNJ "outperform" on Motley Fool CAPS (don't worry, it's 100% free). While you're there, be sure to check out what other investors are saying about JNJ. If you disagree with me, you can vote JNJ "underperform." Later this week, we'll tally your votes to determine which stocks will advance one step closer to the title.
Hope to see you next week!
Read our opposing article on Microsoft, or see all the entries in the tournament.
Do you think you could pitch your favorite stock, or ditch your least favorite one, in less than 27 seconds? That's what we're doing over at Motley Fool CAPS. Check out our new stock videos.
Todd Wenning does not own shares of any company mentioned. He is currently ranked 103 of 24,301 rated investors in Motley Fool CAPS. Johnson & Johnson is a Motley Fool Income Investor choice. Pfizer, Microsoft, and Coca-Cola are Inside Value picks. The Fool has a disclosure policy.
