Johnson & Johnson (NYSE:JNJ) will join the trickle of companies kicking off the start of third-quarter earnings season next week. J&J will step onto the earnings stage bright and early on Tuesday, Oct. 13, with Wall Street looking for year-over-year declines in both earnings and revenue. Unfortunately for anyone holding JNJ stock, the shares’ technical and sentiment data indicates that the path of least resistance appears to be lower.
Diving into the numbers, J&J earnings are expected to fall 11% to $1.45 per share in the third quarter. Furthermore, revenue is expected to dip 5.4% to $17.48 billion.
Historically, J&J has had no trouble topping Wall Street’s estimates. In fact, the company has bested the consensus estimate in every quarter for the past four years. As a result, EarningsWhisper.com reports a whisper number of $1.46 per share for Johnson & Johnson earnings.
Beyond the expected earnings beat, there is little in the way of bullish sentiment for JNJ stock. According to data from Thomson/First Call, only seven of the 19 analysts following J&J rate the shares a “buy” or better, compared to nine “hold” ratings and one “sell.” Additionally, the 12-month consensus price target of $109.50 represents a premium of only 15.2% to yesterday’s close.
Options traders are betting heavily against JNJ stock. The October/November put/call open interest ratio currently rests near an annual peak at 2.25, with puts more than doubling calls among options set to expire within the next two months. This ratio moderates to 1.07 for the October series, but puts still hold a majority heading into J&J earnings.
Click to Enlarge Overall, October implieds are pricing in a potential post-earnings move of only about 2.14% for JNJ stock. This places the upper bound at $97.03, while the lower bound lies at $92.97.
Technically, JNJ stock has rallied off its October lows near $90 only to meet with stiff overhead resistance at $95 — home to its declining 50-day moving average. A breakout above $95 could be big for JNJ, but it would take more than the expected earnings bet to accomplish such a feat.
2 Trades for JNJ Stock
Put Spread: Barring any major surprises, the path of least resistance for JNJ stock appears to be to the downside. With this in mind, an Oct $94/$95 bear put spread has plenty of potential. At last check, this spread was offered at 41 cents, or $41 per pair of contracts. Breakeven lies at $94.59, while a maximum profit of 59 cents, or $59 per pair of contracts, is possible if JNJ closes at or below $94 when October options expire.
Call Sell: Alternately, if you’re not comfortable with an outright bullish JNJ trade, you could look into an Oct $98.50 call sell position. Such a trade is especially useful if you already own JNJ stock, as it allows you to offset some of your portfolio losses in the event of a selloff, but also allows you exposure to any upside up until the stock trades at or above $98.50.
At last check, this option was bid at 14 cents, or $14 per contract. A sold call allows you keep the premium as long as JNJ stock closes below $98.50 at expiration. On the downside, if JNJ rallies above $98.50 prior to expiration, you could be forced to provide 100 shares at JNJ’s current market value for each call sold, which could be quite costly if you do not have enough stock on hand to cover the call.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
