Bargain Hunting on Wall Street: JNJ On Sale
What causes a stock to become cheap?The answer to this question can fill up a book, so we'll focus on one aspect: sometimes stocks become cheap because the Street turns ridiculously negative on a deal (a merger, etc).
Stocks become mispriced because investors are human beings driven more by emotion than economics.
They don't always behave rationally -- that decision bias is exactly why Johnson and Johnson (JNJ) is at a bargain and why we've been buying shares (for our own account) hand over fist.
JNJ is a company whose footprints can be found in everything from band aids to coronary stents - what a business!
The household name is a cash flow giant generating 70 percent more cash from operations than it was five years ago.
One reason JNJ is not in vogue: pharmaceuticals represents 47% of total revenue.
Big pharma is on crutches: ask Pfizer (PFE), whose bloody spill last month put our portfolio on the highway to hell.
Back to JNJ: we find solace in the fact that medical devices and diagnostics accounts for 36% of sales.
The med/diag market is in bull mode.
We believe shares of JNJ are fairly valued at $68 but think investors will pay up to $70 after the GDNT-JNJ arbitrage junkies find something else to inject.
In a recent statement, Lehman Brothers said it expected "arb-related selling pressure to dissipate" significantly in the near future.
The revised terms of the Guidant (GDNT) deal are more favorable to JNJ and the acquisition should give JNJ an enviable position in the defibrillator space.
In other words, it's time to hit the Wall Street mall -- JNJ looks deliciously cheap.
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