Where Will Johnson & Johnson Go Next?

With shares of Johnson & Johnson (NYSE:JNJ) trading around $92, 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.

The FDA today turned turned down — for the third time — the supplemental New Drug Application (or, sNDA) for rivaroxaban (Xarelto, Johnson & Johnson) for use in acute coronary syndrome patients to reduce MI, stroke or death. In addition, the FDA —  for the second time — turned down the sNDA for rivaroxaban in the same population for the reduction of stent thrombosis.

The complete response letters come as little surprise, since an FDA advisory panel last month strongly recommended against approval for the indications. Although Johnson & Johnson has made considerable efforts to fill in the missing data, the FDA reviewers and panel members did not believe the data was reliable enough to reach firm conclusions about the relative safety and efficacy of rivaroxaban for use in ACS. “We remain committed to providing patients who have suffered from acute coronary syndrome with additional protection against stent thrombosis and secondary life-threatening cardiovascular events,” said a Johnson & Johnson executive in a statement. “We are evaluating the contents of the letters and will determine the appropriate next steps.”

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 trading sideways and may need time to consolidate. 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

15.73%

13%

11%

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

Put IV Skew

Call IV Skew

March Options

Flat

Average

April 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 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 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 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

35.16%

-0.95%

166.00%

-13.48%

Revenue Growth (Y-O-Y)

37.09%

3.11%

8.51%

8.46%

Earnings Reaction

-1.08%

0.14%

0%

2.11%

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

P = Weak 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

1.14%

4.02%

4.24%

2.90%

4.07%

Johnson & Johnson has been a poor relative performer, year-to-date.

Conclusion

Johnson & Johnson provides valuable and essential healthcare products and services to many consumers and companies operating worldwide. The company for the third time, today was turned down by the FDA for the supplemental New Drug Application (or, sNDA) for rivaroxaban for use in acute coronary syndrome patients to reduce MI, stroke or death.  The stock has been exploding to the upside in the past several years, but is currently trading sideways. Over the last four quarters, earnings have been mixed while revenues have been rising, which has produced conflicting feelings among investors. Relative to its peers and sector, Johnson & Johnson has been a poor year-to-date performer. WAIT AND SEE what Johnson & Johnson does this quarter.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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