Is It Warranted or Just Investor Sentiment?
Every Friday night, I take some time to reflect on the past week and prepare for the next. I look through the press release pages for all open positions as well as the Google news feed for the week. I want to know if the week’s share price changes are supported by any new information.
Some stocks go up and others go down. Constant change is pretty much the only certainty in the market. Savvy investors know that stock prices are not always based on rational thinking. They also know that excess enthusiasm or fear can create great buy and sell opportunities.
There are two ways to think about the value of an investment. One is the actual value of the company attributable to your share. Earnings per share (EPS) is the most commonly used gauge. This tells us how much of a company’s earnings are attributable to one share of ownership.
There are other measurements you could use. Free cash flow per share shows the actual cash generated for one share. Or EBITDA per share, which is earnings per share without the effects of interest, taxes, depreciation, and amortization.
The other way is the share price. This adds investor sentiment to the equation. Adding human emotion and action is what really creates the market. And it’s the reason share prices can move when nothing has changed for the company behind the stock.
Negative investor sentiment can cause a company’s stock to drop for “no good reason,” and that’s where I look for favorable trades. Lower prices hand us higher yields. That’s when we grab shares at a great price and collect our dividends until the market catches up with the real company story.
One company I’m watching closely right now is Kenvue (KVUE).
The company was split off from Johnson & Johnson (JNJ) on August 23, 2023, and was granted Dividend Aristocrat status. KVUE took JNJ’s consumer health division, and JNJ kept the pharmaceuticals and MedTech businesses. The new structure was intended to streamline operations and expand revenue growth.
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A Series of Blows
Right off the bat, I expected it to take KVUE a few years to find its footing as an independent company. The maker of Listerine, Band-Aid, Neutrogena, and Zyrtec looked like a great consumer staples play. Even better, it paid a solid and rising dividend.
I also expected volatility, but not a 14.5% slide since the start of 2025.
Source: StockCharts
Activist investors have been building positions in Kenvue to push for change. In the second quarter, KVUE replaced four members or 1/3 of its leadership team, although it wasn’t unexpected.
Management has admitted there’s “self-induced complexity” that the team intends to simplify. For example, just 41 of its 115 brands account for more than 2/3 of sales. It also lowered full-year expectations for sales and earnings based on softer demand.
The week of its Q2 earnings call, shares closed at $21.34, just a penny lower than they ended 2024. All the gains for the year were erased. Nothing had really been accomplished and the market reflected that. I think it was all warranted.
However, earlier this month, The Wall Street Journal reported that RFK Jr., Secretary of Health and Human Services, intended to link autism to Tylenol use in pregnant women and toddlers. The rumored report is expected to be released later this month. Until that actually happens, it will remain a rumor.
How to Gain from Market Emotion
A quick Google search showed that a large-scale study in Sweden conducted by the NIH, and a Cleveland Clinic study, both released last year, did not find a link. And we have yet to see the rumored report or any data supporting these claims. Yet shares of KVUE have dropped to just $18.25.
For the sake of argument, let’s assume the claim is valid. Even so, we’re talking about Tylenol use for a small batch of the population. It would not be the catalyst for a mass recall of Tylenol for healthy adults. And it is not uncommon for medicines to be deemed unsafe for certain populations.
The erasure of 2025 gains was warranted. The latest sell-off is pure investor emotion.
KVUE is likely in for a volatile 12 months, but we’ll be collecting a 4.5% yield through it all. That’s a great yield for a consumer staples giant!
There are two ways to look at this, whether you’re adding to a position or starting a new position:
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Add shares now because you plan to hold long term. Tylenol is one of those 41 best-selling brands. If you liked shares at a higher price, get them now at a better price with a better yield.
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Watch shares closely. Rather than buying now, wait for negative sentiment to reverse. You’ll probably pay a little more, but you’ll still get a “cheap” price. This tactic lets you skip the short-term volatility, but you could miss the dividend while you wait.
I will personally use both options. I still like KVUE long term, so I’m adding a few shares at current prices. Once speculation starts to decline, I’ll add a few more.
Don’t forget this strategy goes beyond KVUE. Investor sentiment driven by the news cycle trickles through the market every day. Make sure you’re looking for these opportunities and using them to your advantage.
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For more income, now and in the future,
Kelly Green
P.S. Mark your calendar for another Dividend Digest live event on October 22 titled Boring is Better. We’ll look at how dividends are a powerful tool that free up your most valuable asset: time. I’ll give some specific portfolio allocation examples for different life stages. And this time I’ll definitely allow time for a live Q&A. More details to come soon!
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