Top Picks 2007: Reese screen calls JNJ a Buffett/Lynch buy

Each year Steven Halpern, editor of TheStockAdvisors.com, surveys the leading financial newsletter advisors asking for their favorite stocks for the coming year. This article is part of his 24th annual Top Picks Report.

Johnson & Johnson (NYSE: JNJ) is a favorite conservative investment idea for 2007 from John Reese, editor of Validea, a newsletter that screens stocks based on the strategies of well-known investors such as Warren Buffett and Peter Lynch.

The advisor notes, "I am especially confident in my picks when multiple strategies identify a particular stock as desirable. This is the case with Johnson & Johnson. The stock gets a 100% match based on the Cornerstone Value Strategy developed by James O'Shaughnessy, a 93% score based on the Warren Buffett approach, and a 91% score based on the Peter Lynch method.

"O'Shaughnessy looks for large, solid companies. Cash flow per share must be higher than the market's average cash flow per share, which is currently $2.08. JNJ's is a healthy $4.55.

"JNJ meets Buffett's requirement that earnings have increased every year for the past ten years, and it also has little debt (it could extinguish debt with earnings in less than two years). JNJ also has a return on equity that has consistently been above 22% for the last ten years. It also has strong cash flow of $1.81 per share.

"Finally, JNJ might be appealing to former Fidelity Magellan manager Peter Lynch. Based on its past growth rate and sales levels, Lynch would classify JNJ as a stalwart -- a stock that can produce strong capital appreciation and hold up well in an economic downturn. Its yield-adjusted PEG ratio is 0.93, which this strategy would find acceptable, and its debt-to-equity ratio is around 6%, which is very low and another positive."