Where Will Johnson & Johnson Go Next?

With shares of Johnson & Johnson (NYSE:JNJ) trading around $91, 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 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.

Castleman disease is an uncommon disease of the lymph nodes that acts much like a cancer and causes large swelling in the lymph nodes. Until recently it has had no therapies — but now a drug trial from Johnson & Johnson is showing true promise, according to Bloomberg. The drug being experimented with, Siltuximab, showed promising results in trials with patients.

T = Technicals on the Stock Chart Are Strong

Johnson & Johnson stock has been exploding to the upside in the past several years. However, the stock is currently pulling back as it digests gains. 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 rising key averages, which signal neutral 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

16.61%

96%

93%

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

December Options

Average

Average

January Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral 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 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

-0.95%

166.00%

-13.48%

1050.00%

Revenue Growth (Y-O-Y)

3.11%

8.51%

8.46%

8.02%

Earnings Reaction

0.14%

0%

2.11%

-0.51%

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 = 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

28.38%

18.99%

24.70%

21.38%

24.36%

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 working on a drug trial for people with Castleman disease. The stock has been has been trending higher in the last several years, but is currently pulling back. Over the last four quarters, earnings have been mixed while revenues have been rising, which has led to positive feelings among investors about recent earnings announcements. 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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