These Market Leaders Soon to Be Pushed Aside?

Company’s Numbers Forecasting a Change in the CycleMy favorite pharmaceutical company for long-term investors is still Johnson & Johnson (JNJ), for now.

This business has managed to produce very good financial growth in recent history and its share price has appreciated exceptionally well considering this is a DOW stock, especially over the last two years.

Large-cap companies can’t avoid the business cycle and they can’t avoid industry-specific trends. For pharmaceuticals in particular, the drug development cycle can be very long-winded.

Last quarter, Johnson & Johnson produced exceptional growth in its pharmaceutical business, which is the company’s largest contributor to revenues.

But while Johnson & Johnson’s share price has done extremely well, even over the last few months, it very well could be that this company’s operating momentum is about to change.

Wall Street earnings estimates for the upcoming quarter (the company reports October 14) have been ticking higher, but total sales growth in 2015 is currently very modest. Earnings growth in 2015 is expected to improve by mid-single digits over all of 2014.

Last quarter, company management said that it would not be able to maintain the exceptional sales growth in its pharmaceutical division going forward. We may see this result in next week’s report. (See “Drop in This Company’s Stock Price Makes It Very Attractive Now.”)

On the stock market, equity securities can experience their own business cycles as investors trade in a herd mentality.

Institutional shareholders can actually get tired or bored with a particular company. Johnson & Johnson has an exceptional track record of wealth creation with capital gains combined with dividend growth.

But from 2002 to 2012, the company just traded sideways on the stock market. That’s a long time to go with no material capital gains as an investor.

Not surprisingly though, in the eight years prior to 2002, Johnson & Johnson’s share price increased seven-fold and that doesn’t include dividends.

Many large-caps trade like this, and it’s something you have to keep a sharp eye on because it’s human nature to want to hold on to previous winners (and losers, too).

The Procter & Gamble Company (PG) has done fairly well on the stock market the last few years. In late 1999, the company experienced an earnings miss and investors sold the stock in droves.

It took about seven full years for the position to convincingly break past where it was trading before the earnings miss, which despite being a solid, recession-resistant enterprise, is a long time to go with just dividends.

For shareholders in Johnson & Johnson, it may be time for some reflection over the next quarter or two. We’ll know more once the company reports.

The problem with considering selling a current market leader like Johnson & Johnson is what to go into next for a comparable level of investment risk.

Last year was an exceptional one for the equity market led by blue chips. It’s what I view as a breakout from the previous long-run cycle—a 12-year recovery period from the technology bubble that burst.

As the current market cycle begins to mature, leaders like Johnson & Johnson may soon go by the wayside.