In mid-October, I wrote an article about Johnson & Johnson (JNJ) and at that time I asked if the stock had peaked. The stock rose quickly after that, but has lost ground and it appears as if a neutral to bearish outlook is gaining steam. It was Goldman Sachs that first took a position to sell the stock, and others have grown cold to buying it since then.
Warren Buffett and his investment lieutenants Todd Combs and Ted Weschler were busy buying and selling stocks in the third quarter. According to the filing, Buffett's holding company cut its stake in pharmaceutical giant Johnson & Johnson by 95%.
Stifel Nicolaus noted, "We are initiating coverage of Johnson & Johnson with a hold rating. We see JNJ as a core health care holding and total return vehicle in any environment for investors looking for safety and stability, particularly in these uncertain times." Good general coverage, but they are not interested in buying.
In a report published Monday, Jefferies downgraded Johnson & Johnson from Buy to Hold, and reduced its price target form $78 to $75:
Whilst we still see the potential for J&J shares to outperform through more aggressive capital allocation, we have little evidence to formally model this at present. We had hoped that the MD&D day, which has now been postponed due to hurricane Sandy, could have provided a platform to raise expectations either around capital allocation or balance sheet leverage. We will have to wait for now and we prefer to do this from the sidelines as our current valuation provides limited upside against a worsening environment for reimbursement in both the U.S. and Europe.
Not only is the environment worsening in Europe and the U.S. to inhibit upside potential, but the Levaquin settlements will take a chunk out of revenue streams. Johnson & Johnson appears to be in settlement mode. It has knocked off some more pending litigation, having settled about 25% of the 3,400 lawsuits it faced tied to the dangers of taking antibiotic Levaquin. Only four Levaquin cases have made it to trial so far; Johnson & Johnson has won three of those, but was handed a $1.8 million verdict in the case in which it did not prevail.
The company has a positive outlook on its immediate future. However, according to the figures on the Johnson & Johnson website:
The company updated its earnings guidance for full-year 2012 to $5.05-$5.10 per share. The company's guidance excludes the impact of special items. Consumer sales were down. Worldwide Consumer sales of $3.6 billion for the third quarter represented a decrease of 4.3% versus the prior year consisting of an operational increase of 1.0% and a negative impact from currency of 5.3%. Domestic sales decreased 0.4%. International sales decreased 6.1%, which reflected an operational increase of 1.8% and a negative currency impact of 7.9%. But not all news was bad. Worldwide Pharmaceutical sales of $6.4 billion for the third quarter represented an increase of 7.0% vs. the prior year with operational growth of 11.3% and a negative impact from currency of 4.3%. Domestic sales increased 14.6%. International sales were flat and reflected an operational increase of 8.2% offset by a negative currency impact of 8.2%.
So How Would I Invest in Johnson & Johnson?
As a stalwart global dividend investment, I believe JNJ is always a good stock to own. So from that point of view, it is not a bad idea to buy some stock. As a growth investment, I believe we have seen JNJ run its course for the near future, and it may either turn bearish or at the least move sideways for a period.
Click to enlarge image.
Johnson & Johnson has been on a healthy and steady climb since a huge spike in mid-June. The recent spike in October took the stock into overbought territory according to the RSI indicator, and it has backed off of the steep climb since then. The climb is still going on and continues to look healthy. It moves between the upper and lower Bollinger Bands and continues to use the 50-day MA as a support line. The MACD also points to the strength of the trend, as its MAs barely move below the "0" marker on the valleys as the stock moves. All indicators point to a continued bullish move, but it may not last much longer.
The Options Play
The stock is presently trading around $68.90. I am leaning toward a bearish income strategy, but am also looking for a longer expiration period on the options in case the stock continues to rise.
- Buy an April 2013 put with a strike at "67.50" (priced at $1.85)
- Sell an April 2013 put with a strike of "65.00" (priced at $1.05)
- Net Debit to Start: $0.80
- Maximum Profit: $1.70
- Maximum Risk: net debit
- Maximum Length of Play: five months
Reasoning Behind the Trade
- U.S. and European environments do not look promising for 2013
- Analysts are turning bearish to neutral on the stock
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.