oday's market environment might be uncertain, but one thing is certain: the crow

d is flocking to bonds.
In 2009, investors put $375 billion into bond funds, about 14 times more than in
2008 and more than double the previous record in 2002. In the first half of 201
0, investors put another $138 billion into bond funds, an astounding four-fifths
of the total invested in mutual funds.
This buying spree has sent bond yields plunging near historic lows -- the 10-yea
r Treasury yield recently fell to 2.57% and the two-year note recently fell to 0
.49%, an all-time low.
The financial crisis and the recent spate of bad economic news have sent investo
rs running for the safety of bonds, but are bonds that safe? Rising interest rat
es cause bond prices to decline. And, at near all time low levels, interest rate
s have no place to go but up. [Read: How to Lock in 8% Government Yields]
One well-known investor, however, is not following the crowd. While most investo
rs have been flocking to bonds, Warren Buffett has been going somewhere else. In
fact, the legendary investor added huge amounts of this stock to his company's
portfolio in the second quarter. [Read: Buffett Bets Big on Health-Care with a H
uge Buy]
Johnson & Johnson (JNJ) is the world's largest and most diverse health care comp
any. This New Jersey-based giant has operated for more than 120 years in the res
earch and development, manufacture and sale of health care products through more
than 250 operating companies located in 60 countries around the world. The comp
any generated $62 billion in revenue in 2009.
But, J&J isn't just a pharmaceutical company. In addition to being geographicall
y diverse, J&J is a world leader in three different health care segments: pharma
ceutical, consumer and medical devices and diagnostics. The pharmaceutical segme
nt has several leading drugs including the rheumatoid arthritis drug Remicade. T
he consumer products division includes household staples such as Listerine, Care
free and Tylenol.
So, why did Buffett buy it now? And why should you buy it now?
It's cheap. The stock is near its 52-week low and trades at just about 12 times
earnings, compared to its five-year average multiple of about 16. In addition, J
&J's stock currently yields 3.7%. While the short term direction of the market i
s always uncertain, J&J enables investors to earn quarterly dividends while wait
ing for one of the world's best companies to rebound from its lows. Meanwhile, a
three-year CD is paying about 1.8%.
However, the stock is beaten up for a reason. J&J has had 11 product recalls in
its consumer division in the past year. Products such as children's Tylenol, Acu
vue contact lenses (overseas), and hip replacement products associated with the
company's Mcneil consumer healthcare unit have been recalled for an estimated co
st of $600 million in 2010 alone. As a result, J&J lowered its full year 2010 ea
rnings per share guidance by 3% from $4.75 per share to $4.65 per share.
However, with revenue of $62 billion last year, the company can afford the cost
of those product recalls, and the consumer products segment will likely gain tra
ction again in 2011. Despite the recalls, lower U.S. and consumer product sales
were more than offset by higher international sales in the first half of 2010 an
d total sales increased +2.3% compared to a year ago. Cost cuts have led to high
er net income as well, and earnings per share increased more than +18% in the fi
rst half of 2010 to $2.85 per share.
J&J right now is a perfect example of buying a good company cheap. The best time
to buy a company of J&J's caliber is when investors shy away and valuations are
cheap. The stock underperformed the overall market in 2009 when investors favor
ed more aggressive stocks on the rebound from the Armageddon lows of the financi
al crisis. This year, the recalls have kept many investors away. But the longer
term potential of the company is solid for several reasons.
Defensive industry
While many predict the pace of economic growth in the United States will remain
subdued in the years ahead, noncyclical industries such as health care should be
a good place to invest. After all, people still buy band-aids and aspirin even
when theeconomy is in the dumps. J&J is also geographically diversified, with ha
lf of 2009 sales coming from outside the United States.
Huge growth trends
Worldwide demographic trends will make health care one of the fastest growing in
dustries in the years ahead. Older people require more health care than any othe
r segment of society, and they are getting more numerous and will represent a gr
eater percentage of the population than ever before.
In fact, the fastest-growing segment of the world's population is 65 and older.
In the United States, the "baby boomer" generation is just beginning to hit reti
rement age. Citizens aged 65 and older are expected to comprise 20% of the popul
ation by 2030, or one out of five citizens. In addition, as developing nations b
ecome wealthier, their large populations will demand more and better health care
. About 10% of 2009 sales were generated in the fast growing Asia Pacific and Af
rican regions.
One of a kind company
J&J is the world's largest and most diversified health care company and the epit
ome of a blue chip stock. Here are a few reasons to like the company:
76 straight years of sales increases
27 consecutive years of earnings increases
48 consecutive years of dividend increases
70% of sales are from products with a No. 1 or No. 2 global market share
"AAA" rated credit by both Moody's and Standard and Poor's
Approximately 25% of products sold in 2009 were introduced in the past five year
s
Action to Take --> Bonds might still be the best place to be in the months ahead
, but over the longer term, investors should take a page out of Warren Buffett's
book. J&J is one of the world's best companies and is in a prime position for t
he years to come. Investors looking for a solid value play should consider snapp
ing J&J up while it's still out of favor instead of chasing the tail end of the
bond bubble.

-- Tom Hutchinson
Tom has a 15-year history as a financial advisor with UBS constructing investmen
t portfolios. Tom's background includes a NASD Series 7 and 63 certifications...
Read more...
Disclosure: Neither Tom Hutchinson nor StreetAuthority, LLC hold positions in an
y securities mentioned in this article.
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