After a Great Month, Now May be Time For a Change

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Since I recommended Johnson & Johnson (NYSE: JNJ) as one of the best long-term investments around, the stock has continued its climb.  For one of the lowest-volatility stocks in the market, a 14% gain so far in 2013, and an 8% move in the last month alone is huge.  With a move like this, is it still a good time to get into J&J, or have would-be investors missed the boat on this one?

Why I like J&J

If you want to see my entire rationale for recommending Johnson & Johnson, here is a link to the article I wrote about the company a month ago.  Not much has changed since then.  To sum it up, J&J is one of the largest healthcare companies in the world, and they have a well-diversified product line that includes such household names as Band-Aids, Tylenol, Neutrogena, and many others, in addition to an enormous line of pharmaceuticals and medical devices.

Not so boring, after all

Johnson and Johnson is in a group of stocks that are generally regarded as “boring” and as one of my investing friends put it “for old people,” meaning that this is where you put your money when you’re 70 and don’t care as much about growth than safety.  Nothing could be further from the truth.  I asked that same friend what he thought of as a big company that was exciting, and he instantly said “Microsoft!”  After crunching the numbers, over the past 10-year period, J&J has outperformed Microsoft significantly.  A $10,000 investment in J&J 10 years ago would be worth $19,505 today as opposed to just $15,396 for Microsoft.  Take that, Mike!

The Recent Pop

Anyways, with the rise in J&J looking almost linear for over 3 months now, it may be time to take a step back.  The 8% gain in the past month has changed the way investors perceive the stock.  For example, the 3.18% dividend yield is now 2.97%, and believe me, that psychological 3% level is significant to income investors.  Yields can create price ceilings for stocks, and investors will cycle their money into other stocks that still have higher yields. 

Time to take profits?

I still love J&J as a long-term investment, but with the recent gains, I’m a little more cautious over the short-term.  Not enough has changed with the fundamentals of the company recently to warrant such a rapid increase in what is traditionally a low-volatility stock.  Additionally, the company is set to report first quarter 2013 earnings on Tuesday the 16, which creates a perfect opportunity for a correction if the numbers aren’t fantastic.  At this point, I am definitely in favor of locking in profits and taking at least some of your J&J holdings off of the table. 

So where to go now?

I would recommend getting out of J&J (just for the time being) and moving into one of the other big healthcare names, like Merck (NYSE: MRK) or GlaxoSmithKline (NYSE: GSK). 

While Merck has indeed had a good 2013 so far, it hasn’t had the linear rise that J&J has had, plus Merck is traditionally slightly more volatile that J&J.  Since the beginning of the year, Merck has increased just over 7%, and is still yielding 3.81%.  Merck makes the majority of its money through prescription drugs such as Januvia and Singulair, and trades at a very reasonable 12.2 times forward earnings.

Merck’s 2013 performance:

GlaxoSmithKline is arguably the leader in HIV/AIDS therapeutic drugs, in addition to their other products such as the leading asthma medication Advair.  Glaxo trades at 13.1 times forward earnings and yields just over 5% annually.  While it is seen as a slightly riskier investment than the other two, investors are indeed paid nicely to wait.

Conclusion

While I never expected it to happen so quickly, I think it may be time to get out of J&J for a little while and into one of the high yielders. 


Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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