Is Johnson & Johnson A Buy At These Prices?

With shares of Johnson & Johnson (NYSE:JNJ) trading around $84, 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, manufacture, 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 the general care, women’’s health fields, and nutritional and anti-infective, contraceptive, gastrointestinal, oncology, pain management, and vaccines. It also offers products to treat cardiovascular disease, orthopaedic 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 who continue to demand improved products. As consumers become increasingly health aware, Johnson & Johnson stands to see profits well into the future.

T = Technicals on the Stock Chart are Strong

Johnson & Johnson stock has been on a powerful run towards higher prices. The stock is now consolidating near all-time high prices, so it may need time before continuing on its next leg. 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 around its rising key averages, which signal neutral to bullish price action in the near-term.

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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

18.4%

73%

71%

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

Put IV Skew

Call IV Skew

July Options

Flat

Average

August 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 significant 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?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

-13.48%

1050%

-8.7%

-50%

Revenue Growth (Y-O-Y)

8.46%

8.02%

6.54%

-0.74%

Earnings Reaction

2.11%

-0.51%

1.38%

0.8%

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

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

21.11%

15.99%

12.56%

14.94%

15.08%

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

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Conclusion

Johnson & Johnson provides valuable and essential healthcare products and services to many consumers and companies operating worldwide. The stock has been on a powerful run towards all-time high prices where it is now consolidating. Over the last four quarters, earnings have decreased while revenue figures have increased, which have kept investors pretty happy. Relative to its peers and sector, Johnson & Johnson has been a year-to-date performance leader. Look for Johnson & Johnson to OUTPERFORM.

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