Wednesday, 12 December 2007

Selling some Johnson & Johnson (JNJ)

On the back of reading a bullish post by Howard Lindzon on JNJ, I took a quick look at this company and decided it's worth a short.

JNJ, trading today at $67.75, just a shade off all-time highs, a market cap of $194bn and a P/E of 19.1 (forward P/E is 15.4). The company "operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics".

5y Chart of JNJ

In the face of a slowing economy, I don't imagine the Consumer side of the business can have huge near-term growth. Factor in high commodity prices generally and producing goods and selling them on seems like something that could hit tough times soon. I'd also imagine, that whilst healthcare is traditionally a defensive sector, that it still suffers from the usual supply and demand issues in good times and bad, even if it is less so than a "consumer discretionary" company. A P/E of 19+ just seems aggressive for a company that's already valued at $200bn, and faces a slowing economy in its main market. Plus I think the future of biotech is in some of the smaller genetic-focussed companies, and could imagine the giants having to take them over in an M&A wave lasting for years.

The only thing that bothers me slightly with this trade is that over the last 5 years, it is "only" 40% above the lows, in a period where we've had strong global growth and domestic inflation. So I'm not in this trade for much, maybe just 5% or so. Selling just over $10k worth at $67.75.

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