Aug 22, 2016 – Sean Williams
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 Apple and 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.
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.