Johnson & Johnson (JNJ)

Overall based upon accelerating (home & business) foreclosures, financial weakness in the banking sector, tremendous tax increases on the horizon (suppressing the economy), and a federal spending policy that can only result in double digit inflation, I expect the economy (& stock prices) to decline over the remainder of 2009 and through 2010 at the least.

So the question is not whether JNJ goes up or down but by how it does in relation to the S&P500. JNJ's sterling financial strength and proven management team provides it a great deal of protection against possible declines in the economy. In fact any company with strong financials should perform better than the market average in a down economy.

Now with the prospect of a government run health care bill raising punitive taxes upon any company in that sector, expect the price to remain depressed until everything sorts out. Still given the fact that JNJ has a lot of non-health care related business over which it can distribute those taxes, it should not be as adversely affected as say PFE or MRK.

So I expect the stock price to remain depressed over the short term (giving you time to buy the stock) with a nice bump if Congress fails to pass something before the end of the year. In the mid-term, conservative management, good management, and good financial strength will preserve stock price values better than other S&P500 companies. In the long-term expect JNJ stock prices to rise when the economy improves in line with other companies.

Overall, I'd say that JNJ is a safe bet with reasonable upside and limited downside.

Health care stocks have been punished by uncertainty during the debate over the future of health care in the United States, and while Johnson and Johnson's valuation is not currently compelling, it is reasonable at 13 times earnings, paying slightly better than a 3% yield. Unlike pharmaceutical behemoths like Merck, Johnson and Johnson is at least as much a consumer goods stock as a pharma stock: its products include shampoo, Band-Aids, and other goods which consumers will continue to purchase even when their disposable income is limited. J&J derives a substantial portion of its revenue from overseas, and also engages in currency hedging, giving some protection from a steep decline in the US dollar relative to other currencies.

We follow this company and some other fine businesses on our blog at http://threedollarhedgefund.blogspot.com.