Markets gave investors quite a pump fake earlier this week. After the strong rally on Monday, investors believed that stocks would have a relief rally heading into 2019. Then the Dow sank 800 points on Tuesday.
While the action caused investors’ sentiment to drop sharply, not all stocks had a horrible day. For instance, take Johnson & Johnson (NYSE:JNJ). JNJ stock was basically flat on the day, falling 18 cents per share.
You know stocks had a bad day when a small decline is identified as a positive sign. But that’s the situation with JNJ stock. Because of its dependability, a lot of investors have bought JNJ stock, boosting the shares recently.
That’s why I wrote that JNJ stock had one of the best-looking charts going into 2019 (along with six others). In the wake of JNJ’s previous rally, I had recommended waiting for a good entry point before buying the shares. Sometimes it’s better to be lucky than good, but JNJ stock subsequently did reach a better entry point, and it’s been off to the races ever since.
So should investors buy JNJ stock in the future and, if so, how much should they pay for it?
Why Johnson & Johnson Stock Is Attractive Now
When the markets start to crack, there are few places to hide. However, some stocks do far better than others. and JNJ is in that category, partly due to the consistency it’s demonstrated in the past. For 56 consecutive years, it has not missed a dividend payment and it has raised the dividend. Since JNJ’s payout ratio now stands below 50%, this streak will probably continue for many years to come.
It helps that JNJ has an A+ balance sheet and a business model that, while not totally impervious to economic trends, holds its own in good times and bad times. During recessions, some consumers are going to switch to generic ibuprofen instead of Tylenol and some will delay a few medical procedures. But by and large, JNJ is well-insulated against economic declines.
Over the last few quarters, investors haven’t been very concerned about the economy. Thus, growth stocks have been favored over continuous winners like JNJ stock. But with the yield curve on the cusp of inverting, many investors are worrying about a possible recession on the horizon.
As a result, traditional defensive stocks, such as JNJ, Walmart (NYSE:WMT), and Coca-Cola (NYSE:KO), are rebounding.
While positive developments — like a rally in the stock market or the trade truce with China — can cause a rotation back to growth stocks and out of blue-chip dividend stocks, worries about a recession will likely persist.
Certain economic metrics have decelerated, while interest rates continue to rise. As the yield curve threatens to invert and more investors start throwing around that dreaded “R” word, some investors will have an appetite for stocks like JNJ, WMT, KO and other defensive names.
Timing an Entry into JNJ Stock
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Nothing is worse than piling into a name like JNJ, WMT or KO, only to see those stocks retreat as investors rotate back into beaten-down growth stocks. Is the positive momentum of JNJ stock likely to continue?
The charts above look kind of messy, but they highlight the various support levels and trend lines that are in play. Johnson & Johnson stock had a nice consolidation and breakout on Tuesday, before selling pressure ultimately wiped out the move. That rally took JNJ stock to a new high of $149, and I think it will get back there.
I would love to see Johnson and Johnson stock stay above $144, but a small, further pullback into trend-line support (represented by the blue line) wouldn’t be bearish. I would like another chance to buy JNJ near $140 and/or the 50-day moving average. If JNJ falls below those levels, it could head to the $135 -$136 level. At those levels, however, the risk/reward of JNJ stock is positive.
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.
