Why 3 Billionaires Ditched Johnson & Johnson Stock
August 30, 2016
By Mark Terry, BioSpace.com Breaking News Staff
It’s nice to think that if someone successfully makes billions of dollars, it’s worth figuring out what they’re doing in the stock market. So when three billionaire money market managers recently sold 3.13 million shares of Johnson & Johnson stock, The Motley Fool decided to take a look at why. And whether other investors should follow suit.
One assumption would be that J&J is overvalued, but George Budwell, writing for The Motley Fool, notes that the company has trended higher in comparison to the iShares Nasdaq Biotechnology Index Fund. If anything, he says, the company may be undervalued, at least from a forward P/E ratio standpoint. “Besides offering strong-single digit top-line growth at the moment, this healthcare stalwart provides deeper layers of value for investors with its 54-year history of consecutive dividend increases, top-rated balance sheet, and the most productive pipeline in the entire pharmaceutical industry over the last five years.”
So Budwell then wonders if J&J is worth buying now. It and similarly solid companies are generally good long-term stocks. It has a strong research-and-development program, which has given it the ability to compete with generics and the introduction of biosimilars to its Remicade in Europe. Its hepatitis C program, however, has had problems in the last year, and it’s been hampered by a strong dollar.
“The net result,” Budwell writes, “is that the drugmaker has now built a massive cash position of $42.9 billion, and its balance sheet isn’t hiding an unsightly amount of leverage with a reasonable debt-to-equity ratio of 36.6 percent.”
In July, the company’s chief financial officer, Dominic Caruso, in an interview with Bloomberg News, noted that all three main J&J business units are interested in deals, but does have a tendency to focus on less-risky licensing deals rather than company acquisitions. He did say they weren’t particularly interested in a mega-merger with another pharmaceutical company.
At the company’s second-quarter filing, it was noted that second-quarter profits exceeded analysts’ estimates. Revenue was driven by the pharmaceutical division, riding on the profits of arthritis drug Remicade and psoriasis drug Stelara.
Bloomberg wrote at the time, “One factor boosting sales was that J&J over-estimated rebates to insurers and pharmacy benefit managers. When the actual, smaller rebates were calculated, there was a $140 million increase in J&J’s drug sales.”
So it’s not completely clear why D.E. Shaw & Company, James Simons of Renaissance Technologies, and John Overdeck of Two Sigma Investments dumped 874,805 shares, 1,754,500 shares, and 502,621 shares of J&J stock, respectively.
“So, while it’s certainly disconcerting that these three billionaire investors dumped a fair number of shares of J&J last quarter,” Budwell writes, “retail investors probably shouldn’t follow in their giant footsteps … especially individuals seeking modest levels of growth combined with a solid dividend.”
It’s worth noting that “Rookie Investor,” writing for Seeking Alpha also conducted a recent analysis of J&J’s performance, writing, “When looking at the stock price, one can calculate that the stock is overvalued since it has a P/E ratio of 22.95 and the stock price is at an all time high. Also, there are many great books out there such as Burton Malkiel’s A Random Walk on Wall Street or Jack Bogie’s The Little Book of Common Sense Investing that advises against owning equity or investing actively. While all of this is true, Johnson & Johnson is a rare breed that will provide diversification to anyone’s portfolio. … After looking at Johnson & Johnson’s technical performance against the S&P500 since 1944 and the recent 10 years’ return, it is safe to conclude that Johnson & Johnson has been consistently outperforming the stock market over a long period of time.”