J&J Is Safety in a Dangerous Market

As silly as it might sound, how many mothers would risk saving 50 cents buying generic baby shampoo that risks irritating a baby's eyes? Or how many people would opt to save a few coins for generic eye drops when Visine is so widely trusted and regarded? Population growth and the aging demographic will provide strong growth potential for the company's diverse line of personal-care products.

Outperformance

All stocks are getting sold as the markets delever. Lots of stocks are cheap -- what makes JNJ any different going forward? The ultimate catalyst here is continued market outperformance. Shares in Johnson & Johnson are down about 13% for the year, compared to a decline of almost 45% for S&P 500. The 3% dividend just adds to the case for investment in JNJ here. And despite the continued economic recession, J&J upped its 2008 guidance to just over $4.50 a share. No one likes losses, but being down 10% today (after the dividend payments) almost feels like you're making money.

At times like these, when investors are scrambling for safety, cash seems to be the ultimate default investment. While any investment involves risks, JNJ offers a compelling safety net and a better alternative to cash on a multiyear basis. The stock has proved that over the past year, five years, 10 years, and any other multiyear period you wish to consider.

At $57.50 a share, you are paying less than 13 times earnings based on the $4.50 2008 EPS figure. Looking all the way back to 1992, the P/E has never been this low; J&J is much stronger and more profitable than it was then.

From the cradle to the grave, Johnson & Johnson makes products that you will likely use over and over again. Because of this, earnings are insensitive to the peak earnings syndrome that has engulfed many cyclical businesses today. As Johnson & Johnson continues to grow and increase profits, the share price will follow. It's done so for decades. This stock is a very safe long-term investment in these precarious times.

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At the time of publication, Gad was long Berkshire Hathaway, although positions may change at any time.

Sham Gad is the managing partner of the Gad Partners Fund and the Gad Partners Offshore fund, value-centric investment partnerships based in Athens, Georgia. Gad has written extensively for the Motley Fool and was a securities analyst for UAS Asset Management, a small, value-focused fund in New York City in 2007. Previously, Gad managed assets for the Gad Investment Group. For additional information, please visit www.gadcapital.com.

Gad also runs a value-investing blog inspired by the teachings of Benjamin Graham and Warren Buffett. Additionally, he is currently working on a value investing book to be published by John Wiley & Sons in the fall of 2009. Gad earned his BBA and MBA at the University of Georgia. Send Sham Gad an email. You can reach Gad at [e-mail].