Is Johnson & Johnson a Worthwhile Investment?

With shares of Johnson & Johnson (NYSE:JNJ) trading around $87, 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 health care 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 health care products, Johnson & Johnson is able to support consumers and medical businesses around the world that continue to demand improved products.

Johnson & Johnson is reportedly in talks to pay up to $3 billion to settle 11,500 lawsuits related to its recalled ASR hip implant. The implants were recalled in 2010 after more than 12 percent of them failed within five years. That figure keeps climbing, along with the number of people filing suits against the company. The company would like the suits to be settled by the beginning of next year, but if plaintiffs don’t settle for the proposed $300,000 each, litigation could continue.

T = Technicals on the Stock Chart Are Mixed

Johnson & Johnson stock has broken out to new prices earlier this year. The stock is now trading slightly below all-time high prices, but it may need time to stabilize here. 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 between its key averages, which signals neutral price action in the near term.

JNJ

Source: Thinkorswim

Taking a look at the implied volatility 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

19.08%

76%

75%

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

Put IV Skew

Call IV Skew

October Options

Flat

Average

November Options

Flat

Average

As of Monday, there is 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 significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

E = Earnings Are Mixed 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 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

166.00%

-13.48%

1050.00%

-8.70%

Revenue Growth (Y-O-Y)

8.51%

8.46%

8.02%

6.54%

Earnings Reaction

0.00%

2.11%

-0.51%

1.38%

Johnson & Johnson has seen mixed earnings and rising revenue figures over the last four quarters. From these numbers, the markets have 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), and Novartis (NYSE:NVS) — and sector?

Johnson & Johnson

Pfizer

Covidien

Novartis

Sector

Year-to-Date Return

24.34%

12.78%

15.54%

19.92%

16.81%

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

Conclusion

Johnson & Johnson provides valuable and essential health care products and services to many consumers and companies operating worldwide. The company is reportedly paying up in order to settle a number of lawsuits in regards to its recalled ASR hip implant. The stock has broken out to new prices but is currently pulling back from all-time highs. Over the last four quarters, investors in the company have been happy, as earnings have been mixed while revenues have been rising. 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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