Johnson & Johnson (JNJ) had a huge jump up in June, and I wrote an article back then asking if the stock could maintain that position. Evidently it has been able to maintain and slowly fight its way a bit higher. But not everyone believes the stock can maintain the present level. What is the reason for this and what should an investor do?
Analysts at Goldman Sachs downgraded Johnson & Johnson from "neutral" to "sell." The analysts believe the current price has captured all the potential growth the company has left for the time being. JNJ emerged from a series of rough experiences. The large revenue producing drugs now had to compete with generic drugs and numerous recalls happened over the last couple years, but the stock has remained consistent through it all and has grown from $62 to $70. Can the stock continue to grow?
There may be two reasons the stock has peaked and may not be able to find that extra push to get much higher. First of all, new pharma launches may not have the same impact older launches have. Two drugs, Zytiga (prostrate cancer) and Incivo (Hepatitis C), are also competing with new drugs: Medivation Inc's (MDVN) Xtandi and Merck's (MRK) Victrellis. The competition is supposed to pick up too.
The second reason may be the capital allocation. While the company has traditionally focused on acquisition and management has not hinted any change of direction or plans, major competitors are talking downsizing to generate better value for shareholders. Pfizer, Abbott Laboratories, Covidien, and Rubin are all planning or doing this now. Some analysts have been advocating the same thing for Johnson and Johnson, but the company has not given any indication it will move in that direction.
With a PEG Ratio of 2.26, it would appear the company is greatly overvalued at the moment. With a P/E ratio of 22.1 to an industry average of 18.7, it does not look like a real good bargain right now.
It appears that Johnson & Johnson has done a good job maintaining the level it rose to from mid June to mid July last summer. It rose quickly, gaining more than 10% in a 30 day period. After this it appears to have built a nice foundation around the $67 level and has recently pushed up through the previous high of $69 set last summer. This may be significant considering it attempted to push through this level last summer at least 4 times but was turned back each time. The present climb looks steady and healthy as the stock is using the middle Bollinger Band for support. This is a very healthy climb. The RSI indicator has maintained a high bullish place also which continues to show strength. It has just touched the over bought line at $70 three times without going through so there are no signs of a pullback. The MACD is also steady and bullish. From all observations, this present trend looks very healthy and I expect it would continue under normal circumstances.
But circumstances are far from normal.
The International Monetary Fund says the uncertainty and setbacks in the world economy will cause it to grow more slowly over the next year than anticipated. The international lending organization said Tuesday in a quarterly update of its World Economic Outlook, and the malaise is spreading to more dynamic emerging economies such as China.
Goldman Sachs says sell the stock; it is not going anywhere but has peaked. Some may want to hold on simply because of the dividend, while others may heed the analysts' advice and look for greener pastures elsewhere. I believe the stock may continue up a bit further but nothing of significance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.