Comprised of a broad range of stocks within different industries, the Dow 30 is a good starting point for investors seeking exposure to a specific sector with a big-name equity. In this instance, we examine Merck (MRK – Free Merck Stock Report), Pfizer (PFE –Free Pfizer Stock Report), and Johnson & Johnson (JNJ – Free J&J Stock Report), to show how one might approach selecting a Dow stock within the drug or medical supply space.
While only the former two belong specifically to the drug industry, the latter has a notable presence in that market, even though it is part of the medical supply group. As indicated in the Business Blurb, pharmaceutical products represent one of Johnson & Johnson’s three major segments.
At first glance, the three equities appear to have similar, if not virtually identical, features, with minor differences. They all have an extensive track record of generally rising profits, save for the occasional decline, as clearly shown in the Statistical Array in the center of the Value Line page.
What’s more, they all pay dividends. That’s evident from the dividend yield at the top of the page (Top Label). The yield essentially represents the expected return from cash distributions on the equity over the coming 12 months. On that basis, Merck comes out ahead, followed by Pfizer and then J&J. Specific dividend amounts and increases that have been paid can be found not only in the Statistical Array, but in the Quarterly Dividend box (bottom left-hand corner), as well.
But the similarities don’t end there, which could make it difficult for the investor to decide what to pick. In fact, the trio scores the same marks on several key metrics. Notably, if we look at the Ranks box in the upper left-hand corner of the page, we see that all three boast a top-notch Safety rank of 1 (out of 5). The rank is a comprehensive measure of an equity’s total risk in comparison to all other issues under review. Essentially, it is derived from a company’s Financial Strength and Stock Price Stability, both of which are located in the Ratings box at the bottom right-hand corner. Here, too, we note that all three companies get the same exceptional grade of A++ for Financial Strength, meaning that their financial positions are very sound.
There are some subtle differences, though, that become apparent as we delve deeper. Indeed, in terms of Stock Price Stability, Johnson & Johnson leads the way with its perfect score of 100, while Pfizer and Merck are close behind. The higher the mark, the more steady the stock’s price action is, giving the investor greater peace of mind. This is further supported by the beta coefficient in the Ranks box. It’s no surprise that the trio falls into the same order when comparing each of them by that metric, which gauges a stock’s volatility relative to the overall market (where 1.00 = market). As a reminder, a number lower than 1.00 implies that the equity tends to be less volatile than the broader indices, while a higher number suggests that the issue is more volatile than the general market. The medical supply titan again outdistances the two drug giants, in terms of Earnings Predictability (in the Ratings box); it gets the top score of 100, thereby all but eliminating the possibility for earnings surprises.
Perhaps the sharpest contrast between the three is the Timeliness rank (found in the Ranks box). At this time, J&J is ranked 2, while both Merck and Pfizer only get a 3. Remember, this computer-generated figure indicates an equity’s probable price performance in the year ahead relative to that of the broader market. It factors in a stock’s long-term price and earnings history, recent price and earnings momentum, and earnings surprises. The rank ranges from 1 (Highest) to 5 (Lowest). So, any issue that carries a Timeliness rank above 3 is typically a good choice for the short term. In this case, all else being equal or roughly the same, the medical supply heavyweight is a clear standout. Analyst Erik Antonson sums it up nicely in the Commentary section of the page, saying JNJ stock is a “timely, top-quality, high-yielding blue chip”, and cautiously suggests the stock price could push past its recent highs in the near term.
Nonetheless, Merck and Pfizer may still be worth keeping an eye on. Granted, all three issues do not appear to offer much appreciation potential three to five years out, based on the Target Price Range found in the Projections box (upper left hand corner) and the recent price displayed in the Top Label. And, like JNJ shares, the covering analyst, Michael Ratty, points to the low-risk, income-generating features of the drug stocks in his Commentary. But given that both Merck and Pfizer have major drug products that have lost patent protection and are facing fierce generic competition, as discussed in the analyst’s writeup, a pullback in share price isn’t out of the question. That would create a buying opportunity. Still, at this juncture, Johnson & Johnson shares appear to be an all-around superior choice, suitable enough to give an investor a position in the drug arena.
At the time of this article’s writing, the author did not have positions in any of the companies.