Johnson & Johnson Faces Criminal Probe on Baby Powder

Shares drop as DOJ pursues criminal investigation.

On Friday, Johnson & Johnson (JNJ ) shares dropped by nearly 5 percent in trading. The drop occurred as news developed that the Department of Justice was pursuing the company criminally over claims that it misled the public about possible cancer risks stemming from asbestos in its talcum powder products.

While the company has repeatedly denied any wrongdoing, it currently faces thousands of lawsuits from consumers attributing their cancer to use of J&J products.

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  • With thousands of products, baby powder only accounts for a small fraction of J&J’s revenue. However, cancer-related lawsuits are highly sympathetic with juries, and thus could disproportionately impact the company’s profitability while they play out.

    Action to take: With the rising uncertainty around shares now, investors could look for an entry point to build a long-term stake in an otherwise great company facing short-term legal headwinds.

    The company trades at 15 times forward earnings, a sizeable discount to the average S&P 500 stock right now. And the company has remained profitable and managed to grow even as these lawsuits have unfolded.

    For the time being, investors should look to start building a stake should shares fall farther, say under $125. With a 52-week low of $120, such a price would be close to oversold levels based on the latest news.