Is Johnson & Johnson a Buy at These Prices?

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 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.

Johnson & Johnson is facing an additional $4 billion settlement over its metal-on-metal hip replacements after already paying a $2.2 billion settlement related to the misbranding of Risperdal a little over a week ago. According to Bloomberg Businessweek, Johnson & Johnson's hip replacement settlement will be the largest ever related to a medical device and will resolve more than 7,500 lawsuits. Sources familiar with the matter who spoke to Bloomberg said that Johnson & Johnson will also pay compensation for people whose hip implants fail in the future, meaning the ultimate price of the settlement could end up being much higher.

T = Technicals on the Stock Chart Are Strong

Johnson & Johnson stock has been exploding to the upside in the past several years. The stock is currently trading near all-time high prices and looks set to continue this path. 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 signals neutral to bullish price action in the near-term.

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	14.95%	36%	34%

What does this mean? This means that investors or traders are buying a 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	Flat	Average
January Options	Flat	Average

As of Wednesday, there is 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 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 Q3	2013 Q2	2012 Q1	2012 Q4
Earnings Growth (Y-O-Y)	-0.95%	166%	-13.48%	1050%
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 rising 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), and Novartis (NYSE:NVS) — and sector?

	Johnson & Johnson	Pfizer	Covidien	Novartis	Sector
Year-to-Date Return	33.17%	27.08%	23.91%	24.58%	28.18%

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 facing an additional $4 billion settlement over its metal-on-metal hip replacements after already paying a $2.2 billion settlement related to the misbranding of Risperdal a little more than a week ago. The stock has been has been trending higher over the last several years and is currently trading near highs for the year. Over the last four quarters, earnings have been mixed while revenues have been rising. However, investors have been pleased during 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.