SIVY ON STOCKS from money.com
May 21, 2001

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Steady profits

Companies like Johnson & Johnson that post consistent profit gains are the
best choice to balance volatile tech stocks.

By Michael Sivy

Tech stocks soared on Monday -- their fifth straight winning session. Over
the past two months, in fact, the Nasdaq Composite index has soared more
than 35 percent, fueled by falling interest rates and signs that the
economy is holding up reasonably well. Moreover, after five interest rate
cuts this year by the Federal Reserve, it's likely that the economy will be
in an upswing by next year and that tech stocks will go on to further big
gains over the next 12 to 18 months.

But even the most aggressive investors should think twice about putting too
much money into the tech sector. It will continue to be extremely volatile,
and might hit another air pocket before the economy begins a sustainable
recovery. Fortunately, there are several other stock groups with
above-average growth rates that can help balance a tech-heavy portfolio.
Companies with the most consistent earnings include broadly diversified
makers of drugs and other health-care products. And among those firms,
Johnson & Johnson [JNJ] stands out.

I last recommended J&J in April 2000 at a price of $77.50 and a
price/earnings ratio of 23 (see "J&J bounces").
[ http://www.money.com/money/depts/investing/sivy/archive/000417.html ]
At the time -- well before the downturn had even started -- analysts were
forecasting that the company would turn in earnings growth of 13 percent to
14 percent. And despite the unexpected economic slump, J&J has hit the
high-end of that target. As a result, the stock has gained 30 percent since
then to $100.50 a share. And all the indications are that the company will
be able to maintain its solid earnings growth rate through the rest of this
year and beyond.

A large part of J&J's consistency comes from the fact that it is so well
diversified. In addition to making well-known items such as Band-Aids,
Tylenol and baby shampoo, the company has a booming pharmaceuticals
business, as well as major biotech and medical equipment divisions. Among
drugs, one of J&J's hot new products is Procrit, used to treat anemia. And
the medical equipment division has a state-of-the-art stent -- used to prop
open clogged arteries -- that can treat abrupt vessel closure even in cases
that have traditionally been difficult.

But diversity is not the only explanation for J&J's success. The company
has been extremely deft in managing its portfolio of businesses, disposing
of more than 20 and acquiring more than 40 over the past decade. Most
recently, J&J announced in March that it would acquire Alza, a leader in
drug-delivery technology.

In addition, J&J has raised its dividend every year for the past 38 years,
most recently by 12.5 percent in April. At the same time, the company
announced that it would split its shares 2-for-1 on June 13, for
shareholders of record as of Tuesday's close.

Despite potential long-term returns averaging more than 15 percent
(including a 1.5 percent dividend yield), J&J still trades at a P/E 22
percent below those of other major drug stocks. That discount reflects
J&J's heavier dependence on over-the-counter health and beauty aids and a
less impressive new product pipeline than companies such as Merck and
Pfizer have. Nonetheless, J&J's 26 P/E looks rather low compared with its
growth rate. Adding such a stock to a portfolio of high-flying tech issues
is a no-tears formula for lower risks and more consistent returns.

###

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