Old-time reliables may be good bets in a jittery market

Johnson & Johnson, Kimberly-Clark and a pair of fallen stalwarts

Stocks to think about

June 11, 2000|By Laura Pavlenko Lutton | Laura Pavlenko Lutton,MORNINGSTAR.COM

With many investors ducking for cover these days, there is a renewed interest in old, reliable companies such as consumer-products manufacturers.

Shares of consumer-products companies tend to hold up better than the average stock during economic and stock-market downturns. After all, most consumers don't stop buying laundry detergent or Kleenex when the economy tanks, but they're probably less likely to buy high-technology or luxury products from the go-go growth companies.

The best stocks among the consumer-product makers belong to firms with well-founded growth strategies.

Johnson & Johnson is a good example of an established company with a forward-looking growth strategy. J&J is well-known for its no-tears baby shampoo and Band-Aids, but this company also manufactures many popular prescription drugs, including Retin-A acne cream and Procrit, an anemia treatment. Johnson & Johnson has a strong track record when it comes to profitability and financial health, earning A-plus grades from Morningstar in both areas.

Johnson & Johnson is relying on its pharmaceuticals division to maintain its double-digit earnings growth rate. (The company's net income increased 15.5 percent in the first quarter compared with the year-earlier period, with about 60 percent of those operating profits coming from the pharmaceutical group.) J&J's top-selling drugs will remain under patent protection for several more years and should be a source of sales growth, and the company is developing a drug to treat Alzheimer's disease.

To be sure, Johnson & Johnson's core household products could be selling better. But, given the outlook in the pharmaceuticals division and the stock's reasonable valuation, J&J may be worth a look.

Another appealing defensive stock is Kimberly-Clark. The Dallas-based tissue and paper-towel giant is notable for its new high-margin products and its attention to top-line growth.

Sales growth is expected to improve to about 7 percent this year, up from 5.8 percent in 1999, thanks in part to some hot new offerings, including premium rippled toilet paper and diapers that toddlers can wear in the swimming pool. The company has also expanded into the medical-supply business.

Kimberly-Clark's future profits should also be helped by the company's year-old cost-cutting campaign and the sale of its cyclical pulp-making operations.

Finally, keep an eye on Procter & Gamble and Gillette. P&G's recent uninspiring earnings release and profit warning and competitive problems in Gillette's battery division mean that these stocks are fit only for risk-tolerant investors with long time horizons.

Still, both companies have well-known brand names, and the slightest sign of improved sales growth may send their shares soaring.

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