Does Johnson & Johnson Belong in Your Portfolio?

With shares of Johnson & Johnson (NYSE:JNJ) trading around $103, is JNJ an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Johnson & Johnson engages in the research and development, manufacturing, and sale of various products in the healthcare field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. The company offers a range of products used in general care, women’s health fields, nutritional and anti-infective, contraceptive, gastrointestinal, oncology, pain management, and vaccines. It also offers products to treat cardiovascular disease, orthopedic and neurological products, blood glucose monitoring and insulin delivery products, and general surgery products. Through its wide variety of healthcare products, Johnson & Johnson is able to support consumers and medical businesses around the world that continue to demand improved products.

Johnson & Johnson today announced sales of $19.5 billion for the second quarter of 2014, an increase of 9.1% as compared to the second quarter of 2013. Operational results increased 9.4% and the negative impact of currency was 0.3 percent. Domestic sales increased 14.9%. International sales increased 4.4 percent, reflecting operational growth of 5.0% and a negative currency impact of 0.6 percent. Net earnings and diluted earnings per share for the second quarter of 2014 were $4.3 billion and $1.51, respectively. The second-quarter results included a charge for after-tax special items of approximately $0.4 billion, primarily related to an increase in the litigation accrual as well as integration and transaction costs related to the acquisition of Synthes, Inc. Second-quarter 2013 net earnings included a charge for after-tax special items of approximately $0.5 billion. Excluding these special items, net earnings for the current quarter were $4.8 billion and diluted earnings per share were $1.66, representing increases of 11.3 percent and 12.2 percent, respectively, as compared to the same period in 2013.

“Our strong second-quarter results reflect the continued success of our new product launches and the progress we have made in achieving our near-term priorities,” said Alex Gorsky, Chair and Chief Executive Officer. “Significant advancements are being made in the treatment options and access to care for patients and customers around the world. Our diversified business model, focus on long-term growth drivers and talented colleagues position as well in this evolving and dynamic global health care market.”

T = Technicals on the Stock Chart Are Strong

Johnson & Johnson stock has been trending higher in the past several years. However, the stock is currently pulling back and may need time to stabilize. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Johnson & Johnson is trading above its rising key averages which signal neutral to bullish price action in the near-term.

JNJ

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Johnson & Johnson options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Johnson & Johnson options

12.40%

0%

0%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Flat

Average

September Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Johnson & Johnson’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Johnson & Johnson look like and more importantly, how did the markets like these numbers?

2014 Q2

2014 Q1

2013 Q4

2013 Q3

Earnings Growth (Y-O-Y)

13.53%

34.43%

35.16%

-0.95%

Revenue Growth (Y-O-Y)

9.05%

35.17%

37.09%

3.11%

Earnings Reaction

-1.92%*

2.12%

0.31%

0.14%

Johnson & Johnson has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Johnson & Johnson’s recent earnings announcements.

* As of this writing

P = Excellent Relative Performance Versus Peers and Sector

How has Johnson & Johnson stock done relative to its peers, Pfizer (NYSE:PFE), Covidien (NYSE:COV), Novartis (NYSE:NVS), and sector?

Johnson & Johnson

Pfizer

Covidien

Novartis

Sector

Year-to-Date Return

15.06%

-1.27%

33.79%

12.27%

9.68%

Johnson & Johnson has been a relative performance leader, year-to-date.

Conclusion

Johnson & Johnson provides valuable and essential healthcare products and services to many consumers and companies operating worldwide. The company today delivered strong quarterly results that beat estimates. The stock has been trending higher in the past several years, but is currently pulling back. Over the last four quarters, earnings and revenues have been increasing, which has pleased investors. Relative to its peers and sector, Johnson & Johnson has been a relative year-to-date performance leader. Look for Johnson & Johnson to continue to OUTPERFORM.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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