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While I don't believe in blindly following billionaires into or out of specific equities, the fact that these so-called "super-investors" can have a sizable impact on the performance of individual stocks -- as well as the market as a whole -- means that it's probably a good idea to keep track of their quarterly transactions.Last quarter, for instance, three billionaires tracked by The Motley Fool dumped roughly 3.13 million shares of the healthcare giantJohnson & Johnson (NYSE: JNJ), according to the recent 13F filings with the SEC.
|Fund||Billionaire Owner/Manager||J&J Shares Sold in Q2|
|D.E. Shaw & Company||D.E. Shaw||874,805|
|Renaissance Technologies||James Simons||1,754,500|
|Two Sigma Investments||John Overdeck||502,621|
Data source: whalewisdom.com.
Given this sudden bearish tone emanating from three of the Street's best money managers, I think it's wise to consider if Johnson & Johnson is now a strong sell.
Is J&J now overvalued?
In a year where healthcare stocks in general and pharma stocks in particular have gotten walloped, Johnson & Johnson has somehow continued to trend higher, crushing the performance of the bellwetheriShares Nasdaq Biotechnology Index Fund:
Even so, J&J still doesn't sport an unreasonable valuation compared to its big pharma or blue-chip biotech peers. With a forward price-to-earnings ratio of 17.88, after all, J&J's stock is currently garnering a similar premium relative to Celgene Corp. (NASDAQ: CELG) (18.78), and is cheaper than, say, shares of Bristol-Myers Squibb (NYSE: BMY) (22.42).
If anything, J&J is arguably undervalued from a forward P/E ratio standpoint. Besides offering strong-single digit top-line growth at the moment, this healthcare stalwartprovides deeper layers of value for investors with its 54-year history of consecutive dividend increases, top-rated balance sheet, and the most productive pipeline in the entire pharmaceutical industry over the last five years.
Bristol and Celgene, on the other hand, simply don't come with these additional layers of value -- although Bristol does have a better-than-average dividend yield of 2.56%, and Celgene continues to generate industry-leading levels of revenue growth. In short, J&J doesn't look overvalued within the context of biopharma stocks.
Is Johnson & Johnson worth buying right now?
Dividend aristocrats like J&J are generally great stocks to buy and hold forever. But this large-cap drug stock remains in a class by itself because of its unparalleled dedication to research and development (R&D) among pharma companies. By investing around $200 billion in R&D over the last two decades, J&J has been able to overcome the introduction of biosimilar versions of key drug Remicade in Europe, the implosion of its hepatitis C franchise within just a year's time, the negative impacts of a strong dollar, and even recent weakness in its consumer and medical device business segments.
Additionally, J&J has sidestepped overpaying for rival drugmakers to restock its cupboard, so to speak. The net result is that the drugmaker has now built a massive cash position of $42.9 billion, and its balance sheet isn't hiding an unsightly amount of leverage with a a reasonable debt-to-equity ratio of 36.6%. By comparison, the much tinier Bristol and Celgene had approximately $11 billion in cash combined at the end of the second quarter, showing J&J's unique financial position within the realm of major drugmakers.
So, while it's certainly disconcerting that these three billionaire investors dumped a fair number of shares of J&J last quarter, retail investors probably shouldn't follow in their giant footsteps for the reasons outlined above -- especially individuals seeking modest levels of growth combined with a solid dividend.
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George Budwell owns shares of iShares NASDAQ Biotechnology Index. The Motley Fool owns shares of and recommends Celgene and Johnson and Johnson. The Motley Fool has the following options: short October 2016 $95 puts on Celgene. 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.