Is It Time to Buy Johnson & Johnson?
Last Friday, December 14, consumer staple company Johnson & Johnson (NYSE: JNJ) received a formal invitation from shareholders:
Please meet us in the woodshed at your earliest convenience.
Thanking you in advance,
It was an epic $35 billion beat-down, taking the stock all the way back to levels not seen since... mid-October.
Reuters released a report that seems to confirm a suspicion that's been around for years: that JNJ sold Johnson's Baby Powder for years knowing that it had small amounts of asbestos in it.
The Reuters report even accuses JNJ of trying to cover it all up, paying researchers to say that no, there's no asbestos in Baby Powder. Please keep sprinkling cancer dust on your children.
[I'm sorry, what was that? JNJ's lawyers want to talk to me about some unsubstantiated libelous quip? Tell 'em I'll call 'em back in just a minute.]
If you've been around for a while like me, this is nothing new. From time to time, American companies have ignored and even squelched research that shows that their products will kill you. I mean, American car companies once said with a straight face that airbags won't help you at all, they aren't worth the added expense. Hey, thanks for saving me a couple bucks!
It's depraved. Some would argue that this type of behavior is encouraged by the obsession with quarterly earnings reports. Investors demand growth every three months. Bonuses for management are often tied to short-term financial goals. This type of short-term thinking very often undermines long-term growth and stability. (Didn't the president just say he didn't care about federal debt cause he'll be long gone by the time it's a problem?)
Of course, this type of short-term, immediate gratification thinking is human. Maybe because we don't live forever, we have some kind of cellular directive to get the goods now.
Laissez les Bon Temps Roulez
A couple hours into Friday's beat-down, Wells Fargo was out saying the sell-off was over and done:
Based on prior high-profile product liability cases in drug and device sectors, we believe any potential settlement should be manageable for JNJ... Even if all 11,700 talc cases settled for $280,000 per case (the highest per case settlement amount among the cases we've tracked), the total liability to JNJ would be $3.3 billion. With over $19 billion of cash and marketable securities at the end of the third quarter, we continue to see the talc litigation as manageable for the company.
Think about that statement for a second: 11,700 cases related to asbestos in the Baby Powder. I guess $280 grand a pop is the going rate for knowingly exposing people to a cancer-causing agent.
Of course, any “settlement” will come with no admission of any wrongdoing...
Any Wall Street investment bank could have made this statement. We all know full well that you're not a real investment bank if you don't have the phrase “choose profits over people” chiseled into the marble over the front door. Still, there's a certain consistency that it's Wells Fargo. But I digress...
I'm not sure what motivated Wells Fargo to come out and say “the coast is clear” after just a couple hours. I mean, just on a PR basis, it seems like a bad move to be the first to say, “Go ahead and buy the baby cancer powder company.”
But even from a ruthless profiteering perspective, this may be irresponsible advice. The U.S. has been dealing with asbestos-related lawsuits for 40 years. Settlement amounts are way over $100 billion, and it's driven more than 60 companies out of business.
Why is this analyst so eager to wade into the fray?
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I Don't Know
You know what the three most underused words in investing are? I don't know...
I mean, I do know. But that's the answer. I don't know. Sheesh. The answer to the question “what are the three most underused words in investing?” is “I don't know.”
Seems like that shouldn't have been so hard.
You ever see a guy on CNBC get asked what the impact of China raising the reserve requirements for local banks will mean for gambling revenue in Macau? And then the guy says, “Oh, it's not gonna have any impact at all, go ahead and load up on Wynn Resorts.”
You're supposed to think, “Wow, this guy really knows what he's talking about.” But what you should really be thinking is, “This guy is completely full of horse hockey and has no idea what he's talking about.”
I guarantee you the words “I don't know” will make you more money and cause you fewer losses than any other words there are. “I don't know” will set you free.
Try it sometime. Is it time to buy JNJ? I don't know. Maybe? I've seen stocks bounce right back from big drops like this. I've also seen them not bounce back.
JNJ and the other consumer staple companies depend on lifetime value. That is, if you start buying Mennen Speed Stick when you start stinking (around age 15), then you're likely to keep buying Mennen Speed Stick for the next 50 years. But let me ask you: If you have any Johnson's Baby Powder in your house right, what are you gonna do with it? Sprinkle it liberally on your private parts?
Yeah, probably not. Which might mean JNJ just lost an entire generation of buyers.
So again, I don't know. I am 53 (or 4, who can remember?), divorced with two kids. I've literally got nothing to prove — my ego checked out a looong time ago...
(I say “nothing to prove,” but the truth is, I live to defeat my partner at The Wealth Advisory, Jason, in our monthly Top 10 stock competition. We do a monthly video, totally worth the price of admission.)
I'm going to stick with stuff I do know. Which makes things so much easier, and so much more profitable.
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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