We recently compiled the list of the 13 Best Quality Stocks to Buy Now according to the hedge funds using the latest sentiment data. In this article, we are going to take a look at where Johnson & Johnson (NYSE:JNJ) stands against the other quality stocks.
Investing in 2024 is significantly different from investing in the 1950s and onward. This is because these days investors have to. sift through thousands of stocks and countless data points and signals to separate the wheat from the chaff and make the right investment decisions. Amidst this hubris, the ability to pick out ‘quality’ stocks becomes important, and there’s quite a lot of financial literature available that helps determine what such stocks are.
Typically, stock analysis involves analyzing a firm’s financial statements to determine profitability, operating strengths, cost control, asset utilization, and other metrics. Some of these are also present in financial literature that discusses quality stocks. One such research paper comes courtesy of researchers associated with Research Affiliates. They point out that metrics that typically define a quality stock include earnings stability, capital structure, profitability, accounting practices, and investing strategies. Within these, the quality factors that were also related to returns were investment strategies, dividend payouts, profitability, and accounting strategies.
The next thing to ask is, whether quality stocks are any different from standard run of the mill stocks when it comes to share price performance. For context, the last 12 months on the stock market have been dominated by a few key themes. These are artificial intelligence, inflation, interest rates, and GDP growth. Higher rates and inflation are bearish stock indicators, while growth and AI have proven to have kept the market buoyant at a time when rates are at two decade high levels. So, over the past year, exchange traded funds that track quality stocks have appreciated by 12% to 27%, the midpoint of which is slightly lower than the S&P 500’s 23% price appreciation over the same time period. However, picking the right quality stocks appears to have its advantages as well, since the high end of the performance, i.e. 27%, is far higher than what the index has delivered.
ETFs and research aren’t the only ones that talk about quality stocks. One hedge fund that’s become quite well known for its focus on quality stocks is Cliff Asness’ AQR Capital Management. One of the largest hedge funds in the world, AQR had a 13F investment portfolio worth $58 billion as of Q1 2024 end according to Insider Monkey’s research. Close to a quarter of its portfolio is invested in the technology industry, and the second biggest category is services stocks. AQR focuses on stocks that follow its strategy of Quality Minus Junk or QMJ. According to its founder Cliff Asness, a quality stock is defined by its shareholder payouts, growth, profitability, and sound financial and general management. We recently took a look at some top AQR Capital management stocks and you can check them out by looking at 13 Best Stocks To Buy Now According To Billionaire Cliff Asness.
Before we head to our list of the best quality stocks, a general overview of the stock market is relevant. Right now, investors are wondering when the first interest rate cuts might occur. The latest bit on this front came in the form of the Personal Consumption Expenditure (PCE) data from the Commerce Department. This data set revealed that the 12 month inflation in the US stood at 2.7% in April 2024, which was still higher than the Fed’s preferred rate of 2%. Additionally, the data also provided investors with some bearish signals. These were apparent in the readings for consumer spending, which slowed down to 2% in the first quarter of 2024 over the robust 3.3% reading in Q4 2023.
Lower spending means less money sloshing in the economy, and while this might help reduce prices, it can also affect business performance, economic growth, and naturally, stock market performance. Data from the CME Fed Watch Tool shows that 47% of all investors polled expect a 25 basis point rate cut in September, while an additional 7.5% believe that the Fed might get generous and cut rates by as much as 50 basis points.
With these details in mind, let’s take a look at some top quality stocks that hedge funds are buying.
A dose bottle of the medication is in the medical tech’s hand
Our Methodology
To make our list of the best quality stocks to buy, we ranked the 30 largest constituents of a quality stock ETF and picked out those with the highest number of hedge fund investors in Q1 2024.
By the way, Insider Monkey is an investing website that tracks the movements of corporate insiders and hedge funds. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
12. Johnson & Johnson (NYSE:JNJ)
Number of Hedge Fund Shareholders In Q1 2024: 80
Johnson & Johnson (NYSE:JNJ), the consumer goods and personal health firm, ended May 2024 on a strong note as it completed the acquisition of a medical devices manufacturer. This expands the firm’s market and enables it to grow revenue by targeting new markets. The average of 23 one year analyst share price targets for the firm is $172.16, and the average share rating is Buy.
During 2024’s first quarter, 80 hedge funds out of the 919 profiled by Insider Monkey had bought stakes in Johnson & Johnson (NYSE:JNJ). One fund with a valuable stake was Ken Fisher’s Fisher Asset Management. It held 6.6 million shares that were worth $1 billion.
Johnson & Johnson (NYSE:JNJ)’s shares have returned 160% over the past decade, lower than the S&P 500’s 212%. This casts doubts on whether it can outperform the broader market, and a forward P/E ratio of 13.79 makes it undervalued compared to the broader market. However, the firm does have more than forty new products in late stage clinical trials that could inject life into the shares.
Johnson & Johnson decided to spin off its consumer health business to create two more focused and agile entities. Kenvue Inc (KVUE) is designed to concentrate on consumer health products, including well-known brands like Tylenol, Band-Aid, Listerine, and Neutrogena, while Johnson & Johnson focuses on its pharmaceutical and medical device businesses. Here is what Oakmark Funds said about Kenvue recently:
“Kenvue Inc. (NYSE:KVUE) became the largest standalone consumer health company following its split-off from Johnson & Johnson in May 2023. The company’s highly recognizable brands, such as Neutrogena, Listerine, Tylenol and Band-Aid, have been market share leaders in their respective categories for generations. However, Kenvue’s first year as a public company was clouded by litigation and market share losses in certain categories. As a result, Kenvue now trades for just 16.5x trailing earnings, a substantial discount to the market and other consumer health and packaged goods companies. We see an opportunity for the company to improve efficiency and re-invest the cost savings into increased product development and marketing, which should help improve its growth and brand equity.”
One factor that recently depressed the stock price of JNJ is legal risks. Johnson & Johnson is advancing a $6.475 billion proposed settlement to resolve tens of thousands of lawsuits alleging that its talc products, including baby powder, contain asbestos and cause ovarian cancer. The settlement will be handled through a third bankruptcy filing of a subsidiary, LTL Management, aiming to end all current and future ovarian cancer claims, which represent 99% of the talc-related lawsuits. Previous efforts to settle these claims via bankruptcy were rejected by courts. J&J asserts that its products are safe and has garnered support from the majority of plaintiffs’ attorneys. The settlement requires 75% support to be finalized and would prevent further litigation. This deal builds on prior settlements related to mesothelioma and state consumer protection actions, with J&J having already incurred significant costs for talc-related settlements. We don’t think JNJ shares will start delivering satisfactory returns until this legal cloud over the company goes away.
Overall, JNJ ranks in 12th place among the 13 best quality stocks to buy now. You can visit the 13 Best Quality Stocks to Buy Now to see the other quality stocks that are on the hedge fund radar. While we acknowledge the potential of quality stocks, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NVIDIA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. The article was originally published at Insider Monkey.