Can Johnson & Johnson Continue This Bull Run?

With shares of Johnson & Johnson (NYSE:JNJ) trading around $89, is Johnson & Johnson 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, 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.

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 over 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 Strong

Johnson & Johnson stock has been surging higher over most of the last few years. The stock is now pulling-back a bit from all-time high prices and may need some time. 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

16.34%

83%

81%

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

September Options

Flat

Average

October 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 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), Novartis (NYSE:NVS), and sector?

Johnson & Johnson

Pfizer

Covidien

Novartis

Sector

Year-to-Date Return

27.02%

13.16%

15.20%

17.41%

15.83%

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 is reportedly paying-up in order to settle a number of lawsuits in regards to its recalled ASR hip implant. The stock has been surging higher and is currently trading near all-time high prices. Over the last four quarters, earnings have been mixed while revenues have been rising which have made investors happy. Relative to its peers and sector, Johnson & Johnson has been a year-to-date performance leader. Look for Johnson & Johnson to continue to OUTPERFORM.

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