Buy or Sell J&J’s Stock Now?

Johnson & Johnson’s (NYSE:JNJ) 2nd Quarter earnings were less than impressive, but expected.  J&J’s revenue dropped 0.4% quarter over quarter to $16.6 billion with net income dropping a whopping 49% to $1.4 billion.  Despite these dismal numbers, the company came in at EPS of $1.30, slightly beating analyst estimates of $1.29.

To complete the gloom, J&J lowered its full year 2012 guidance to a range of $5.0 to $5.07 per share from the previous range of $5.07 to $5.17.  A sympathetic Wall Street bought the company’s rationale of weakening European economies and after a brief drop, the share price recovered.  Year to date JNJ shares are up 4.41%.

Johnson and Johnson has been around for more than 100 years and is now considered a bellweather stock for the healthcare sector.  Despite the sector’s reputation as a defensive sector in tough times, J&J is not exactly setting the hearts of its investors on fire.  So what’s up with JNJ right now?  Is this American icon a BUY, a WAIT and SEE, or a STAY AWAY?

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

C = Catalyst for the Stock’s Movement

The recent announcement of ECB bond buying as a salve to apply to Europe’s economic woes may or may not work.  For the time being, the markets appear satisfied but real evidence of the program actually making a difference will act as a catalyst for any US company with significant exposure to European markets.

H = High Quality Pipeline

The real opportunity for catalytic movement with a stock like JNJ is approval of drugs and medical devices in the company’s pipeline.  Consumers know J&J for its iconic brand names like Band-Aid, Tylenol, and Neutrogena; but the company derives only a little over 23% from its consumer healthcare division.  The real money is in Pharmaceuticals and Medical Devices & Diagnostics, together accounting for about 78% of total revenue.

E = Equity to Debt Ratio is Zero

With a debt to equity ratio of only 0.19, or 19%, JNJ shines on this measure.  Rival Pfizer (NYSE:PFE) has a debt to equity ratio of .48, or 48%, with both Merck (NYSE:MRK) and Bristol-Myers Squibb (NYSE:BMY) at 0.34 (34%).

A = A-Level Management Runs the Company

Followers of American investing icon Warren Buffet saw this whale shed around two-thirds of Berkshire Hathaway’s (NYSE:BRK-A) position in JNJ. Like others, he acknowledges the company’s diversity could minimize losses due to deteriorating macroeconomic conditions.  However, back in early 2012, Buffet was quoted as saying that J&J has “obviously messed up in a lot of ways in the last few years.”  In a CMBC interview, he said about the company: “They have some wonderful products and a wonderful balance sheet, but too many mistakes have been made at Johnson & Johnson.”   The company is still embroiled in legal battles and Department of Justice marketing investigations of some of its drugs.

T = Technicals on the Stock Chart are Strong

In July of 2012, the company’s share price crossed above the 20, 50, and 200 day Simple Moving Averages. As of September 7th 2012, the share price was 0.59% above the 20 Day SMA, 0.38% above its 50 Day SMA, and 5.55% above its 200 Day SMA.

S = Support is Provided by Institutional Investors & Company Insiders

J&J is 67.07% owned by institutional investors.  The top five holders are UBS Global Asset Management, Vanguard Group, BlackRock, Wellington Management, and Bank of New York Mellon.  As a DJIA (Dow Jones Industrial Average) component, one would expect substantial institutional ownership.  However, fellow Dow Components Merck (NYSE:MRK) and Pfizer (NYSE:PFE) have larger percentages of institutional ownership with Merck at 75.2% and Pfizer at 73.3%.

T = Trends Support the Industry in which the Company Operates

Healthcare sector investors are rightfully drooling over the prospects of the coming wave of Baby Boomer retirements.  This is a global phenomenon and, when coupled with dramatic increases in life expectancies, bodes well for companies like JNJ that are well-diversified in the sector.

However, the big players like JNJ and PFE are going to need this boom since they are at risk from patent expiration, market penetration of generic drugs, and legislative efforts to rein in the explosion in health care costs.

Conclusion

For long term investors who can tolerate short term volatility, JNJ is a definite candidate for Buying on the Dips.  The outlook for the healthcare sector over the long term screams BUY, BUY, BUY for solid players in the space. While their recent performance is reason for some investors to think WAIT and SEE, it is hard to imagine this storied stock as a SELL for anyone but a momentum trader.

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