This Stock’s 24% Year-to-Date Gain Signaling a Buy Opportunity“Opportunity cost”—it’s a phrase used in microeconomic theory to denote the costs that are forgone by not having your resources in the highest returning assets.
It is a phrase that’s pertinent to the stock market.
Without question, I remain completely taken aback by what has transpired with the stock market since the beginning of the year.
Looking at the numbers, not being invested in many corporations has been costly.
Excluding the reasons why, the simple fact is that the Dow Jones Industrial Average is up 16% since the beginning of the year (not including dividends).
The S&P 500 is up 15.7%. The NASDAQ Composite is up 14.8% and the Russell 2000, an index of small-caps, is up 16.6% (not including dividends).
I think this stock market can smell the end of quantitative easing.
More meaningful, however, is the Federal Reserve’s policy regarding interest rates, which are going to continue to be low for the near future, as it has been made very clear.
This is a huge, perhaps neglected, certainty for the stock market and corporations.
Making the case for being a buyer in this market is extremely difficult. Institutional investors have already placed their bets and a lot of corporations—good companies with real staying power and solid prospects for earnings growth going forward—are fully priced.
Johnson & Johnson (NYSE/JNJ) is a benchmark stock. Like many large corporations, Johnson & Johnson does everything it can to squeeze every penny out of its bottom line. The company lays off employees, closes plants, and does everything to minimize taxes. Johnson & Johnson’s 10-year stock chart is featured below:
Chart courtesy of www.StockCharts.com
Like many global corporations, Johnson & Johnson grows organically and by acquisition.
In the second quarter last year, the company bought Synthes Incorporated, a global manufacturer of orthopedic devices, for $20.2 billion (in cash and stock).
In its first quarter of 2013, the company’s worldwide sales were $17.5 billion, representing a gain of 8.5%. The acquisition of Synthes, net of a separate divestiture, helped revenues by 5.7%.
Revenue strength in the first quarter was strongest in the U.S. and Canada. According to the company, sales gained 11.2, coming in at $8.0 billion.
Unlike many other global corporations, Johnson & Johnson experienced sales growth in all international regions. But the standout growth at home is meaningful.
The opportunity cost of not owning Johnson & Johnson’s shares since the beginning of the year has been significant. On the stock market, the position is now up approximately 24%, excluding its dividend payment (recently boosted 8.2%), since the beginning of the year.
From 2005 to 2011, the position was flat, while the corporation paid increasing dividends.
This is the way so many corporations trade, and it should be part of an investor’s expectation that there will be considerable periods of non-performance. (Read “Stock Market Fake-Out: Where Is the Retrenchment?”)
With a price-to-earnings ratio of approximately 24, Johnson & Johnson is fully priced on the stock market.
But I don’t expect this position—or the stock market for that matter—to just come apart without some sort of astonishing shock, like a big change in Fed policy, war, sovereign debt shock from Europe, or a big derivatives trade gone bad.
All eventualities are possible with the stock market at a record high. But the opportunity cost of not being in it has proven to be significant.
A meaningful, full-blown correction in the stock market would be a very healthy development for the medium-term trend.
Given current information, I think Johnson & Johnson will be a buying opportunity.
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