Johnson & Johnson Stock Is In The Perfect Buy Zone

A great earnings report -- followed by a dip -- makes JNJ stock an attractive buy

Is Johnson & Johnson CEO Alex Gorsky Earning His Pay?

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Johnson & Johnson (NYSE:JNJ) was not part of the rally on Tuesday when the Dow Jones Industrial Average, S&P 500 and other U.S. stock indices raced to new all-time highs. JNJ stock fell about 4.2% despite beating on earnings per share and revenue expectations. Is that a warning sign from the market to watch out? Or should we jump into J&J stock?

JNJ grew fourth-quarter sales 11.5% year-over-year and saw net income jump 9.5%. At the midpoint, management is calling for full-year 2018 revenue of $81 billion and earnings per share of $8.10. Consensus expectations were looking for earnings per share of $7.87 on revenue of $80.7 billion.

In other words, the selloff is kind of a headscratcher. The company beat on estimates for the most recent quarter, and guidance came in ahead of expectations. Management also said it will repatriate $12 billion in overseas cash. What more can Johnson & Johnson do?

Should We Buy J&J Stock?

If you liked JNJ stock before this earnings report, you should love it now. It’s 4.2% cheaper than where it was the day before and its stock is setting up nicely. We’ll get to the chart in a minute, but let’s look at the fundamentals.

Last April, Johnson & Johnson bumped its dividend by 5%. Given the new tax code and all that cash it just repatriated, I would be looking for a bigger bump this April. Over the last five years, J&J has increased the dividend between 5% and 8.1%. A 10% bump seems like a stretch, but with the new tax situation and robust economy, you never know. I would be looking for a 7.5% increase and be happy with any amount over that.

Trading with a price-to-earnings (P/E) ratio of 24 isn’t necessarily cheap. But a forward P/E ratio of just 18 is reasonable. For starters, Johnson & Johnson has a second-to-none brand name. It’s got strength in its business, a solid balance sheet and is a dependable dividend payer. In other words, it’s worth the premium.

Fortunately though, the numbers back up JNJ stock too. Based on the company’s estimates, we’re looking at near-6% sales growth and roughly 11% earnings growth this year. Before the report, analysts were only looking for earnings per share growth of 8.1% in 2018 — and that was on a lower fourth-quarter earnings estimate too!

In other words, we’re talking about a mid-single digit revenue grower and a double-digit earnings grower. Given all of JNJ’s other positives, a forward P/E of 18 is pretty reasonable in my mind.

Trading JNJ Stock

It’s worth noting that Johnson & Johnson carries a market cap of $380 billion. However, with Microsoft Corporation (NASDAQ:MSFT) and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) eclipsing market caps of $700 billion and $800 billion respectively, and Apple Inc. (NASDAQ:AAPL) nearing the $1 trillion mark, maybe J&J stock doesn’t seem all that absurd.

What does the chart say?

chart of JNJ stock price

Dating back to last April, we have a pretty solid trend line in place. With Tuesday’s pullback, JNJ stock is right back to this trend-line. Short-term traders could buy now and use a close below this trend as their stop-loss.

However, considering how close JNJ stock is to $135, I think it would warrant adding to the position rather than severing ties. I flagged $135 as a big breakout trade back in October. Since then, JNJ has been in a powerful uptrend. Notably, the 200-day moving average would likely come into play as support should J&J stock keep falling.

Investors could buy an initial position now near trend-line support and add to it on a retest of $135.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

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