Johnson & Johnson (JNJ) has been a market juggernaut through 2013 as the stock has drawn a straight line from $70 to $88 at its highs in May, a whopping 25% return for a relatively low volatility stock. Fueling the trend in stock price has been a powerful combination of strong fundamentals and pessimistic sentiment, an equation that often results in market-beating returns.
Recently, the stock has pulled back and successfully tested short- and intermediate-term support, providing traders with an opportunity to grab shares before it resumes its climb higher. The chart below identifies the support “zone” for JNJ shares that exists at the $85 mark, a price point that the stock surged through on the June 26 trading activity.
Click to Enlarge Thursday’s surge in prices propelled JNJ shares above $85, shifting the stock back into short-term bull mode with a likely target of $90 over the next month or so. What makes this more interesting, and possibly explosive, is that despite the stock’s year-to-date performance, there is still a large contingent of bearish investors that will likely drive the price even higher as they adopt a bullish outlook for JNJ.
First, the short sellers that have been hammering the stock for the last year. At its peak, the short interest ratio for JNJ was higher than 20 during 2012, a number that has declined lately as the short sellers have been parsing their positions in defeat. Currently, the short interest ratio lies at 5.5, still high, especially given the stock’s superstar performance. The relatively high short interest ratio suggests that potential for a short covering rally still exists to help JNJ shoot higher.
Similarly, the stock is ripe for upgrades as only 57% of the analysts covering the stock have it ranked as a “buy”. The analyst community hates missing opportunities to trumpet a stock like this, which means that we could see some of the bearish or neutral analysts upgrade their outlook, which almost always help move things higher.
For now, we’re eyeing the shares as a buy at current prices and would even add positions by dollar cost averaging if the shares retraced to their recent lows at $82.50. More aggressive traders may choose to leverage the upside with a call option. For this strategy we like the JNJ October 87.5 calls currently trading for about $2.75 per contract.
Trader X frequents national investment conferences and has developed several market analysis tools that harness the powerful combination of behavioral analysis and technical analysis. He has decades of experience as a registered broker.
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