JNJ: When does contrarianism turn to stupidity?

[mhdousa]

Hi all -

I'm framing this question as about JNJ, but it's really a general question about how to be contrarian while avoiding value traps.

 

As I gain familiarity with analyzing individual companies, I have a few companies I own and follow.  These are either good capital allocators (Fairfax, Markel, Leucadia) or "high-quality" large-cap companies (JNJ, ABT, MSFT, XOM) that are cheap on a relative basis.  Given current valuations and my relative newness to this, this approach makes sense to me.

 

My JNJ thesis is really about its brand: they have a history of making quality drugs, devices, and consumer goods and the current valuation is underestimating this quality.  But, as everyone knows, they have had major quality-control issues.  Though JNJ is still is a respected brand name, almost all brands eventually falter for some reason (exceptions: Coke, Kraft among others).  At what point does enough become enough and you decide they've hit a point where they are in the decline phase?  Or all of the current headlines just blips and they will continue to persevere and succeed?

 

I hope my question makes sense.  Thanks in advance.

-M

[Parsad]

When there is impairment of the actual underlying business' competitive advantages...for example Kodak.  A case could be made that we are in the primary stages of impairment of MSFT's moats.  That same thing can not be said about JNJ or XOM.  Cheers!

[Guest Bronco]

I know 0% about science - but I heard from a good friend working at a pharma that one of their plants produced a "crappy" product b/c the Nitrogen they used was less than average quality.

 

When the chemmy engineers modeled this out, they assumed a certain quality of gas.  However, this plant (located somewhere in Europe where they drink a lot of pints) intentionally used inferior gas to save money.

 

This company I am referring to is NOT JNJ but I wonder how much of this type of activity goes on.

[S2S]

I know just a tiny bit about healthcare, as that's (part of) what brings home the bacon. But I can not profess to even come close to rival the thousands of MDs with years of actual experience in the trade who also happen to be suppliers, end users, researchers, employees, investors, other stakeholders in these companies when it comes to knowledge about drugs, devices, or procedures. So I'd AVOID making judgement calls on brand power or "moats"... or, at least, not place my (likely inaccurate) subjective opinions of such matter as the cornerstone of an investment thesis.

 

Besides, there's the risk of participating in a Keynesian beauty contest: making investment driven by expectations about what other (likely much smarter) people think.

[ubuy2wron]

Hi all -

I'm framing this question as about JNJ, but it's really a general question about how to be contrarian while avoiding value traps.

 

As I gain familiarity with analyzing individual companies, I have a few companies I own and follow.  These are either good capital allocators (Fairfax, Markel, Leucadia) or "high-quality" large-cap companies (JNJ, ABT, MSFT, XOM) that are cheap on a relative basis.  Given current valuations and my relative newness to this, this approach makes sense to me.

 

My JNJ thesis is really about its brand: they have a history of making quality drugs, devices, and consumer goods and the current valuation is underestimating this quality.  But, as everyone knows, they have had major quality-control issues.  Though JNJ is still is a respected brand name, almost all brands eventually falter for some reason (exceptions: Coke, Kraft among others).  At what point does enough become enough and you decide they've hit a point where they are in the decline phase?  Or all of the current headlines just blips and they will continue to persevere and succeed?

 

I hope my question makes sense.  Thanks in advance.

-M

The book the Dhando investor which i highly recommend deals with this issue. Basicaly most great investment opportunities come along to the value investor because of some mishap. He suggests that it takes about 3 years for many problems to be fixed and recognized in the stock price. Si if you buy JNJ and its still a dog 3 years later time to move on is his advice.