J&J Doesn't Need Band-Aids

10/28/2008 10:00 am EST


Mark Fightmaster

Financial Analyst, Schaeffer's Investment Research, Inc.

Mark Fightmaster of Schaeffer’s Investment Research says the drug and consumer-products giant is poised to move up as the market calms.

Recently Barron's Online looked at Johnson & Johnson (NYSE: JNJ), asserting that the company's recent sell-off has made the stock "too cheap to ignore" (October 21st).

[The Weekday Trader column] notes that JNJ dropped 23% from September 8's close of $72.22 per share through October 10th. On a year-to-date basis, JNJ is 4.6% lower, and just 1.4% lower on a 52-week basis.

JNJ does face challenges, including increasing competition from generic drugs. However, the article states that JNJ's stock is trading at its lowest price-to-earnings multiple in a decade. In fact, the author states that JNJ's 2.9% dividend yield offers a "compelling opportunity." This gave Russell Croft, manager of the Croft Value Fund, cause to tell Barron's Online, "this is one of the babies that got thrown out with the bath water."

On October 10th, Zacks Investment Research upped JNJ to [a Buy recommendation], prompting a rally that helped the stock add 14%. Standard & Poor's pharmaceutical analyst Herman Saftlas noted that JNJ's "interests [are] spread out all over the health-care industry, J&J does not live or die by any one product," which provides the company with a diverse and "very big cushion."

JNJ is one of the members of the Dow Jones Industrial Average (DJIA), resulting in its [getting grief] from Wall Street. The firm's Schaeffer's put/call open interest ratio (SOIR) checks in at 0.95, meaning that puts nearly equal the number of calls in the front three months of options. In addition, this ratio is higher than 81% of those taken during the past 52 weeks.

If this pessimism unwinds, the stock could enjoy a push higher. Analysts are bullishly aligned toward JNJ, but there are four Hold ratings, meaning that upgrades are a possibility. Furthermore, positive initiations [of coverage] could take place, which could also help to push the stock higher.

I mentioned JNJ's year-to-date and 52-week performances previously, but let's take a look at other technical aspects. The stock is perched atop its 80-month moving average, [below] which it has never closed.

This trend line is advancing through the lower $60 region, (where it closed Monday—Editor). If you can tolerate a slight bump in the road, the stock could be attractive. This health-care conglomerate could make it out of our current volatile market with its health intact.

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