With Ebola still rampaging across West Africa and cases popping up in the United States, it’s clear that the virus is now a financial event.
That means we need to think about this logically.
And we also need to invest logically.
Over the past few weeks, we’ve watched as one “clinical stage” pharma firm after another has seen its stock price rise and plummet on rumors about who has the most likely Ebola vaccine.
Instead, I want to introduce you to a solid big-cap company that is gearing up for a major Ebola drug trial and could have a product out in just seven months – and it would likely see hefty gains when its drug hits the market.
Now, before the crowd notices, let’s take a look…
Sidestep the Frenzy
If ever there was a case study in the importance of following Rule No. 2 of my five-part Tech Wealth System, it’s the speculation brouhaha surrounding possible new Ebola drugs. You’ll recall that Rule No. 2 states “Separate the Signal From the Noise.”
As the media tries to handicap which biotech firm might get an Ebola compound on the market, they gloss over one key fact: It will be difficult for any of these small companies to scale up quickly.
Investing in small biotech firms sometimes does make sense. From my 30 years of experience in the biotech industry, I know investors can make a mint by picking up shares of under-the-radar clinical-stage firms before they receive U.S. Food and Drug Administration approval for new drugs.
These “Ebola stocks,” however, are fully “on the radar.” Therefore, they’ll be highly volatile not only because markets are choppy and news driven, but also because people are speculating on who the eventual winner will be.
Just look at Tekmira Pharmaceuticals Corp. (Nasdaq: TKMR). The stock of this clinical-stage firm is now up 33% over the past three months on the strength of non-Ebola drugs it has under development.
But in the month since its Ebola drug program became the focus of news, Tekmira is off nearly 20%. By comparison, the bellwether Standard & Poor’s 500 Index is up 1.1% during the same time.
And this disparity understates how volatile shares of Tekmira have become. The company’s stock gained nearly 16% on Oct. 3. But over the next two sessions it was off by 23%.
In fact, since the stock reached a closing high of $29.53 on Oct. 3, it’s fallen 42.6% through Oct. 30. Buying this kind of roller coaster at the wrong time could really hurt your portfolio.
Of course, some speculators and swing traders will profit greatly by playing the Ebola news. But these folks are mostly thick-skinned vets with plenty of risk capital they can afford to lose.
In my more than 30 years of knocking around technology and the life sciences, I have learned that you make the most money over the long haul by remaining focused and disciplined.
Small-Cap Growth, Big-Cap Safety
And that’s why I think tech investors would do well to take a good look at Johnson & Johnson (NYSE: JNJ).
While consumers know the company is well known for Johnson’s Baby Shampoo, Band-Aids, Neosporin and Listerine, the company is also a leader in medical technology and the largest drug company in the world.
Pharmaceuticals is also the company’s fastest-growing division, having increased sales nearly 19% in the third quarter to $8.3 billion.
In the past five years, J&J has brought 14 new drugs to market and had total pharmaceutical sales of $12.47 billion over that period. As far as new drug sales go, that’s more than J&J’s closest two competitors – Novartis AG (NYSE ADR: NVS) and Gilead Sciences Inc. (Nasdaq: GILD) – combined.
And the company is seeking regulatory approval for at least 30 new drugs by the end of 2017.
Those are small-cap growth numbers within a huge-cap company – and that means we should pay attention.
And we should pay special attention to J&J’s partnership with Danish biotech firm Bavarian Nordic (OTC: BVNRY). J&J says it’s spending $200 million to accelerate and expand an Ebola vaccine program that begins human clinical trials in January
Paul Stoffels, J&J’s chief scientific officer, notes the vaccine proved safe and effective in recent trials involving monkeys, usually a good sign a drug will work in humans.
If the FDA approves the drug, J&J says it could have roughly 250,000 doses available by May. There were 9,500 confirmed cases of the Ebola virus worldwide as of late October.
While it’s hard to estimate the impact of the new drug on J&J’s bottom line, I’m not concerned.
The company’s potential market is $8 trillion or more. And J&J is definitely confident in its future. Following a 59% third-quarter increase in earnings per share (EPS), the company thinks it could bump that up another 50% to $5.99 a share.
Thus, with J&J, we could profit from a breakthrough Ebola vaccine in a way that also provides stability. In other words, should the trials fail, J&J won’t get hammered the way a clinical-stage company would.
Here’s another reason to like J&J.
If you’re making a “Buy” list now, in addition to some fast-growing tech stocks, companies with strong cash flows and consistent dividend payouts should be at the top.
J&J fits that description just about perfectly.
In fact, it’s an elite class of stocks known as “dividend aristocrats.” These are companies that have increased dividends for at least 25 consecutive years.
Johnson & Johnson has been paying increased dividends annually for nearly five decades, and it became an aristocrat in 1987. Over the past three years, it’s hiked the quarterly dividend payout by between 5.6% and 8.2%.
It’s highly unlikely J&J will cut this payout, which means we won’t see the sharp declines that occur when a company slashes its dividend.
Second, dividends mean you’re making money while you sleep. Let’s say you buy a $100 stock with a 2.5% yield that goes up on average 7% annually. At the end of five years, the cash dividend goes from $2.50 a share to $3.27, a 30% increase.
If you reinvest the dividends, you’re getting more shares without lifting a finger. Add in price appreciation, and you make even more money.
Not counting the dividend, J&J has returned roughly 45% over the past two years, compared with the S&P 500’s increase of 37%. With a market cap of $303.43 billion, the stock is trading at $108 a share.
I also like J&J’s stability in the recent volatility. J&J has a “beta” of just 0.61, meaning that for every 10% the market changes, J&J moves just 6%.
Thus, with Johnson & Johnson we have a shot at making some speculative profits from an Ebola breakthrough – and those increasing dividends.
This 128-year-old company gives us access to cutting-edge medical science and the kind of stability that makes for a great foundational play.
And that’s how we increase our wealth through tech – in every way we can find.