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JNJ May Provide Some Relief in a Correction

January 26, 2011 – by Richard Band

We received unpleasant news from the housing front Tuesday. According to the Case-Shiller survey, house prices for November fell in 19 of America’s 20 largest cities — and hit new post-bubble lows in nine major metro areas: Atlanta, Charlotte, Chicago, Detroit, Las Vegas, Miami, Portland, Seattle and Tampa. But that didn’t prevent the S&P 500 and Nasdaq from squeaking out a tiny gain, after struggling most of the session.

It’s pretty obvious what’s going on here: Institutional money managers who were caught underweighted in stocks during the market’s torrid September to January run are buying every dip, hoping to win back some lost ground.

Will it work? Eventually, maybe. I suspect, though, that within a couple of weeks, these Johnny-come-latelies will rue their haste. Most of the merchandise they’re eagerly grabbing today will have dropped 5%-10%. That’s when we’ll go on our next shopping spree.

For now, I continue to recommend heightened caution. More and more market sectors are beginning to stumble — the classic sign of an approaching “correction.”

Precious metals are the latest casualty. At Tuesday’s low, gold bullion had tumbled $100 an ounce since the turn of the year. Meanwhile, silver, seemingly invulnerable just a few weeks ago, has fallen by an even larger percentage. I actually believe this is a healthy pullback, which will set up another good buying opportunity in the metals perhaps three to six weeks from now. However, we’re not there quite yet.

Polls still show too much speculative enthusiasm for gold and silver, and the big commercial interests (such as metals dealers and mining houses) haven’t yet stepped up their buying to a point where it could stop the price erosion. Be patient, and wait for the dinner bell to ring!

One of the few bargains worth nibbling at even now is health care giant Johnson & Johnson (NYSE: JNJ). This morning, JNJ reported Q4 operating earnings of $1.03 per share, matching Wall Street forecasts. But sales came in on the light side, and the Street wasn’t pleased with management’s 2011 guidance of $4.80 to $4.90 per share — about 15 cents below the consensus.

In cases like this, it pays to remember that all great businesses experience growth slowdowns from time to time. Procter & Gamble (NYSE: PG) did last year, and now they seem to be coming out of it. JNJ will follow suit.

The key is to buy when the stock’s valuation is near a low ebb. That would certainly appear to be true of JNJ, which is trading at 12.6 times estimated year-ahead earnings, versus 17 times as recently as four years ago.

The shares also yield a generous 3.5%, almost double the S&P 500 Index (and 50% higher than JNJ’s average yield over the past decade).

Buy JNJ at $62.50 or less. From here, I’m projecting a 13%-15% total return (gains plus dividends) in the next 12 months.