As the markets keep ripping higher, you might be reluctant to commit new capital. After all, the stock market closed 2013 at record levels. In fact, the S&P 500 just wrapped up its best year in the last 16, and the Dow booked its best annual performance in 18 years. As a result, you'd think the search for modestly priced blue chips would be difficult.

At first glance, health care giant Johnson & Johnson (JNJ -1.82%) looks fairly expensive. But the truth is, J&J's earnings were unfairly punished over the past year, and in addition, its rivals are even more aggressively valued. Those investors not giving J&J its due could be missing out on an opportunity.

Some health care stocks look downright expensive

On most investing web sites, J&J appears to have a price to earnings ratio of over 20 times. This looks expensive, but that level still compares very well to the valuation of Bristol-Myers Squibb (BMY -0.72%) Bristol-Myers Squibb expects to earn $1.74 in adjusted earnings this year, which would place its 2013 P/E at approximately 30 times. Bristol-Myers Squibb is doing a nice job of growing its business, as its core earnings rose 12% in the most recent quarter. But it holds a valuation multiple that should make you pause.

Plus, a deeper analysis of J&J reveals it's even cheaper than it seems. J&J's earnings were depressed for most of 2013 due to one-time charges and other non-recurring items. Consider that J&J expects to earn at least $5.44 per share in adjusted profits in 2013, which exclude the impact of special items. Such items include litigation expenses, in-process research and development, and intangible asset write downs, all of which have hidden J&J's true earnings potential.

In all, these one-time items have depressed J&J's profits by more than $2.5 billion through the first three quarters. Assuming J&J hits its goal when it reports full-year results on January 21, its trailing P/E multiple will actually be 17.4 times.

In fact, J&J's core operating earnings make the stock look cheap not just in comparison to the overall market, but when evaluated against some of its peers. Some big pharma stocks are even more aggressively valued by the market.

Why operational excellence separates Johnson & Johnson
Admittedly, J&J isn't the cheapest pharmaceutical stock. Some of its rivals are indeed cheaper, but for good reason. For example, pharmaceutical giant Merck (MRK -1.22%) advises investors it should earn $3.50 in non-GAAP adjusted earnings, at the midpoint of its guidance. While Merck is cheaper than J&J on a trailing basis, (the stock changes hands for 14 times 2013 earnings), an important caveat needs to be considered.

J&J has a distinct advantage over Merck, in that their respective profits are going in opposite directions. Merck's full-year earnings guidance represents a decline versus the prior fiscal year. Merck has warned that its 2013 net income will decrease by as much as $5.6 billion versus 2012. Revenue is expected to fall between 5% to 6%. This is because Merck continues to struggle with patent expirations.

By contrast, J&J's world-class businesses make it a truly one-of-a-kind company. J&J has grown its adjusted earnings for 29 years in a row, and will likely make it 30 when the company reports its 2013 full-year earnings. Results through the first nine months of 2013 were very encouraging. Excluding the impacts of currency fluctuations, J&J grew sales in all three core operating segments (consumer, pharmaceutical, and medical devices) in the third quarter.

Pass on J&J at your own risk
J&J is much more attractive than it seems on the surface, as it's been punished for one-time charges against earnings. The truth is that J&J is actually cheaper than both the market and major competitor Bristol-Myers Squibb. And, J&J is in a better position than Merck. As a result, J&J is much cheaper than it seems, and is still a value stock at today's price.