Johnson & Johnson CEO Alex Gorsky. Image source: Johnson & Johnson.
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This year, we've witnessed all three major U.S. stock market indexes hit new all-time highs, which is nothing short of amazing considering the year began with the worst two-week tumble in recorded history and culminated with all three major U.S. indexes losing at least 10% of their value through mid-February from the beginning of the year.
But the long-term lesson is simple: The buy-and-hold investor usually triumphs. Since 1950, we've borne witness to 35 stocks market corrections of at least 10%, when rounded to the nearest integer, and in each and every instance, we've watched as stock market corrections have been buried by economic growth and bull market rallies. Smart investors understand that stock valuations have a tendency to rise over time, which is why they're always on the lookout for high-quality stocks.
Could this be the first $1 trillion company?
Still, the one psychological mark that continues to be elusive for investors is the $1 trillion valuation mark. You could arguably say the race is on to reach this lofty ceiling, with expected contenders like Appleand Alphabet, the parent company of Google, leading the way. But, don't ignore healthcare conglomerate Johnson & Johnson (NYSE: JNJ), which currently finds itself among the 10 largest companies in the world with a market valuation of $328 billion as of Friday. If the cards fall in J&J's favor, it could become the first company to add 12 zeroes behind its valuation.
How, you ask? There are three factors working in its favor.
Image source: Getty Images.
1. Product inelasticity
Economic cycles are inevitable in the U.S. economy. Although upswings tends to last a bit longer than downswings when we're talking about bull and bear markets, the U.S. economy has entered a recession, on average, about every six years since 1929. Johnson & Johnson, though, provides products that are considered inelastic, meaning whether the economy is running on all cylinders or struggling, it tends to generate a consistent amount of growth and cash flow. In plainer terms, it's pretty close to recession-proof.
Think about this from another angle. The consumer can't choose when they're going to get sick, or what type of illness they'll develop. That alone would imply that two of J&J's three operating segments -- pharmaceuticals and medical devices -- should do well in a robust or recessionary economy. J&J's consumer product segment is the only area where some weakness could be observed, but even here we're talking about consumer health products like Band-Aids that tend to be mostly resistant to downward pricing and demand pressures.
A number of companies with larger current market valuations than J&J are more susceptible to recessions, which could allow Johnson & Johnson to close this valuation gap over time.
Image source: Getty Images.
2. High-growth drugs
Secondly, don't underestimate the growth or pricing power of Johnson & Johnson's pharmaceutical segment.
Between 2009 and mid-2014, J&J brought 14 novel therapies to market, of which seven became blockbuster drugs (i.e., annual sales of $1 billion or more). Looking forward, J&J is forecasting that by 2019, it'll submit new drug applications for up to 10 drugs it believes have blockbuster potential. One of the most recent of these is Darzalex, a multiple myeloma drug that demonstrated an intriguing response rate of 29% in patients who had taken a median of five prior lines of therapy and progressed. Label expansion could easily push Darzalex into the category with more than $1 billion in sales per year.
Another fast-growing blockbuster in J&J's arsenal is blood cancer drug Imbruvica, which is co-owned with AbbVie (NYSE: ABBV). J&J originally partnered with Pharmacyclics on the drug's development more than four years ago. Imbruvica today already has a few label indications under its belt, and it may have more to come. Peak annual sales could touch upwards of $7 billion, which bodes well for AbbVie, which purchased Pharmacyclics, and J&J.
What investors need to understand is that these blockbusters from J&J have a long runway of a decade or more before generic competition is introduced. J&J can use the cash flow generated from these drugs to do more internal research, as well as seek collaborations or bolt-on-style acquisitions to complement its pipeline.
Likewise, J&J's pricing power looks to remain strong since Congress could run into many roadblocks in an attempt to cap or control prescription drug pricing.
Image source: Getty Images.
3. Long-tail medical device growth
Finally, Johnson & Johnson has a long-tail growth opportunity in medical devices that could give it the final push toward a $1 trillion valuation.
According to the U.S. Census Bureau, America's elderly population is on track to nearly double to 83.7 million people between 2012 and 2050. As life expectancies lengthen, the reliance of the elderly on the healthcare network is also presumably going to increase. That's where J&J's medical devices come into play. J&J's leading position in orthopaedics via hip and knee replacements, as well as spine and trauma surgery, could be a major catalyst in the decades to come.
Don't overlook the impact of the Affordable Care Act in improving access to medical care for the general population. In just two-and-a-half years, we've witnessed the uninsured rate fall by more than six percentage points to 11%, according to Gallup. This would represent an all-time low reading for the national pollster. If patients have easier access to medical care, J&J could be a continued beneficiary.
However, it's important to keep in mind that J&J is traditionally not a fast-growing, high-volatility stock. It has no chance to double in valuation overnight. However, over time, and with continued drug and device innovation, J&J does have the chance to push forward toward a $1 trillion valuation -- maybe even before any other company.
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Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors.The Motley Fool owns shares of and recommends Alphabet (A and C shares), Apple, and Johnson and Johnson. It also has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.