Shares of Johnson & Johnson (NYSE:JNJ) have been stuck between $126 and $132 over the past few months. Despite being an blue-chip stock with a strong balance sheet and dependable dividend, investors are not gobbling up JNJ the way they once did.
Part that reason can be pinned on the seesawing trade war as it teeters between resolution and escalation. While the headlines can wreak havoc on the overall stock market, a more specific catalyst is likely weighing on JNJ stock: The opioid crisis.
More specifically, who’s at fault for the crisis.
J&J and the Opioid Crisis
One can make a really compelling argument for why Johnson & Johnson only played a minimal role in the epidemic. However, that’s not stopping a long list of lawsuits from potentially piling up.
Recently, the Oklahoma attorney general came after Johnson & Johnson. Rather than settle, J&J decided to fight the suit and was ultimately ordered to pay $572 million for its role.
Many view this fine as questionable, particularly given the fines that have been levied against other players who had a far larger and more harmful role in the opioid crisis.
The ruling in Oklahoma will surely be fought by J&J, with the hopes of appealing that fine to a much smaller sum. The problem though is, even if it is reduced significantly, what other states will look to shake down Johnson & Johnson?
One of the real culprits, Purdue Pharma, faces more than 2,600 lawsuits related to the opioid crisis. However, the company is in bankruptcy protection and was reportedly looking at a settlement between $10 billion and $12 billion.
Not to say that the opioid situation isn’t bad — it is — or that companies shouldn’t be held responsible — they should — but J&J doesn’t seem like the true culprit. However, it has the fattest wallet and for that reason, states will likely come after it. That opens it to headline risk, whether investors become immune to it or not is another question.
Trading JNJ Stock
Above is a weekly chart of Johnson & Johnson stock. It highlights a few keys that I find important, such as uptrend support (blue line) and the $126 to $128 area (blue box). One can see just how pivotal this area has been, as shown via purple arrows on the chart.
For now, this level continues to buoy JNJ stock price. Will it last? It’s impossible to say, but we at least have a reasonable setup from here. $126 to $128 is support, while ~$132.50 is resistance. It doesn’t help the bull case that the 50-week moving average is also keeping a lid on the stock.
Over $132.50 resistance and perhaps JNJ stock can start to make its way back to $140+. On the downside, if JNJ loses the $126 level, we could see a decline down to the 200-week moving average.
The setup really is that simple: Above $132.50 is bullish, below $126 is bearish.
Bottom Line on Johnson & Johnson
The choppy trade action and opioid crisis are concerning short- and intermediate-term concerns, but Johnson & Johnson is still a great long-term company.
While analysts expect roughly flat revenue growth this year, forecasts call for 4.3% growth in 2020. For earnings growth forecasts, analysts are a bit more optimistic. That said, expectations are modest, calling for growth of 5.1% this year and 6% in 2020.
For 2019, estimates call for earnings of $8.60 per share. That leaves JNJ stock trading at 15 times this year’s earnings. That’s not an unreasonable valuation, even for just modest growth. J&J has other blue-chip qualities though.
It’s balance sheet is AAA-rated, while shares yield 2.9%. Johnson & Johnson stock has not only paid, but has raised its dividend for 56 consecutive years. Those are two very dependable qualities to lean on as a long-term investor.
So what’s the bottom line? Long-term investors can take comfort in knowing that JNJ remains a solid long-term company. But until it clears $132.50, the trade can remain choppy. And until the opioid crisis clears up a bit, headline risk is present.
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.
