JNJ has been a steady large cap leader in the past 2 years. Since the stock’s breakout to a new all-time high in early 2013, JNJ has remained above its rising 50 week moving average save for two brief selloffs this year:
That’s why it’s noteworthy that JNJ is only up a few percent from its early July high. That is in contrast with the health care ETF, XLV, which is about 10% higher than its early July high.
JNJ’s rally has been largely driven by multiple expansion over the past 2 years. In fact, JNJ’s trailing 12 month P/E is now around 18, its highest level since 2005:
Of course, back then, JNJ was routinely growing EPS at around 10-15% per year. It has not grown EPS by 10% year-over-year since 2008. Moreover, it’s now a $300 billion market cap company. With sales growth of 0-5% and EPS growth of 4-8% expected over the next 2 years, the potential for further multiple expansion might be limited.
We received a question in our Your Questions Answered section about possibly fading JNJ near the $109-$110 resistance area that has held even as the broader market has powered higher:
JNJ (Johnson & Johnson) rallied back to it’s upper limits very quickly. Wondering if a long put (with April expiry) is more appropriate for this situation? If not, what spreads might be?
This was my answer:
If you are bearish on JNJ, I’d prefer a vertical put spread rather than an outright put in JNJ, mainly since the skew is relatively steep (meaning downside puts still have a decent amount of premium compared to at-the-money puts). For example, you could buy the April 105 put for around $2.75, or you could buy the April 105 / 90 put spread for around $2.30. Given that the 90 strike is nearly 20% away, I like reducing that cost by selling the put.
JNJ has stalled out near a 3 month high, so this is a decent structure for those who are looking for a name with relatively low implied volatility that is trading near its highs but that has shown relative weakness compared to the broader market.