In a perfect world, we’d all have access to the same information, and stocks would price themselves quickly and accurately, and there’d be no “mystery” or uncertainty in taking a position.
It’s a pretty thought.
Only there is one catch – there wouldn’t be any massive opportunities like the one I’m going to show you, either.
You see, as a thrifty man, I’m always hunting for a good deal.
The best, most satisfying, ones are always those that effortlessly fall into your lap.
And that’s exactly the kind of play that we’re going to look at.
It’s the next best thing to getting something for nothing.
It’s not unlike what used to happen in brick-and-mortar stores back in the day, before barcodes and RFID tags, when a high school kid would go around with a sticker gun, sticking prices on items, and make a mistake.
It might not have been so great for the employee, but it was always a sweet feeling for the consumer to get an unexpected deal.
Well, that is happening right now in one of the best pharma companies on the market…
And it’s a “sweet deal” investors won’t want to miss out on…
The “Gentle” Giant
Plenty of the big pharma companies have been struggling to keep their blockbuster revenue on track, even as some of their top sellers are reaching the end of patent exclusivity or new competitors are entering into the same market.
The primary focus and management challenge, as a publicly traded company, is growth. There are really only two ways to get it:
- Develop a robust pipeline of promising drugs and drug candidates
- Run out and buy a robust pipeline of promising drugs and drug candidates
The best pharma companies, like the one I’m about to name here, judiciously do a little bit of both…
In this case, though, there’s a twist – a welcome, lucrative one.
You see, this major drug company also has a rock-solid consumer products division that accounts for a respectable 20% of annual revenue.
I’m talking about Johnson & Johnson(NYSE: JNJ) – the 130-year-old “gentle giant” of a company that makes Listerine, Tylenol, and No-More-Tears baby shampoo (and has paid an increasingly juicy dividend every year for the past 55 years).
Fact is, there’s a lot more happening here than meets the eye, on a number of levels.
According to Business Insider, J&J is the No. 7 most powerful brand in the world – on the consumer side.
That’s impressive, but it says next to nothing about its pharma business.
And this is precisely the dilemma that analysts find themselves in when looking at the stock (and markets when pricing the shares)…
“Is it a consumer goods company? Is it a pharmaceutical company?”
The truth is, it’s both.
But the market’s J&J identity crisis creates a unique profit opportunity for us.
You see, we can take advantage of their confusion.
Its consumer division is good for around $12 billion a year, while its pharmaceutical business rakes in upward of $32 billion a year.
Now, its recent first-quarter numbers showed that its pharma business only grew 1.4% versus the same quarter last year. However, the problem with headlines is that they don’t tell the whole story.
There were several one-time write-offs this quarter, particularly to encourage more coverage and sales of its drugs through pharmacy benefit managers (PBMs). As we’ve discussed recently, the PBMs can make or break a drug these days. They decide whether drugs are covered by insurance, how much of them is covered, etc. Working with them is a good sign.
What’s more, some of J&J’s newer drugs are doing very well. Its leukemia drug Imbruvica saw sales grow 60% in the past year. Sales of its blood cancer drug Darzalex nearly doubled.
And there’s also the potential that its blockbuster $2.3 billion a year blood thinner Xarelto is in promising shape to get expanded labeling to treat coronary and peripheral artery disease.
This arsenal could be even more impressive in the very near future.
A Powerful Pipeline
J&J knows that in the big pharma arena, you need to grow your pipeline whenever, and however, you can, either internally or externally. This is how you not only endure, but thrive in the long-term.
That’s what makes J&J’s recent activity so shrewd.
Recently, the U.S. healthcare giant purchased Swiss drugmaker Actelion in a $30 billion all-cash deal.
The acquisition gave J&J access to the small biotech’s line-up of high-price, high-margin medicines for rare diseases, helping it diversify its drug portfolio as its biggest product, Remicade for arthritis, faces cheaper competition.
But here’s the sweetest part of this savvy acquisition.
As part of the deal, Actelion will spin out its research and development unit into a standalone company based and listed in Switzerland, under the name of R&D NewCo and led by Actelion founder and CEO Jean-Paul Clozel.
Now, J&J already holds a 16% stake in R&D NewCo. But they also will hold the rights to purchase an additional 16% in coming years.
That creates a potential pipeline for J&J without it having to take on the risks of early-stage drug development.
But the real advantage to J&J is it gets some new drugs that will help the bottom line immediately.
Plus, its massive distribution network will do wonders for getting these new drugs out into the global market.
Fueling Up on Future Growth
Now, J&J has some tepid headline numbers and it will get oversold from time to time.
This happens all the time to stocks.
But that’s why I don’t just read the headlines. You have to dig deeper.
This is one of those rare opportunities to buy a foundational stock with expanding growth prospects at a great price – and a 2.7% dividend to boot.
Remember, this company, which got its start selling ready-to-use surgical dressing in 1886, has thrived through two world wars, significant economic upheaval, and a massive technological shift over the past 131 years.
The “pharma-sumer goods” model may seem odd, and indeed that’s what’s got analysts perplexed, but there’s no denying this has served Johnson & Johnson very well.
And right now, thanks to that prevailing confusion, it trades well below its pharma peers as well as its consumer staple peers, and its five-year average P/E.
Its net operating margin and net profit margins continue to rise. While U.S. pharma sales were only up 1.4%, worldwide sales were up 4.1%.
There’s lots of fuel for that all-important future growth, too.
Its Darzalex drug also received approval from European regulators to broaden its existing uses for treatment of multiple myeloma. That means it will also likely expand its use in the United States in coming quarters.
And best of all, recently Johnson & Johnson and some of its partners announced plans to file for regulatory approvals for 10 potential blockbuster drugs (good for $1 billion in sales a year) over the next four years.
The bottom line here is that since Johnson & Johnson is trading at such a deep discount right now, this is just too tempting to pass up.
I hope you take a look…
- Strategic Tech Investor: Sometimes the Road to Wealth Is Paved by Tech – and Toothpaste.
- Strategic Tech Investor: You Love Dividends – and Now Silicon Valley Does, Too.
- Strategic Tech Investor: This Household Name Is Also a “Stealth” Ebola Stock.