Event: Johnson & Johnson (JNJ) reports Q2 results tomorrow before the open. The options market is implying about a 1.8% earnings move, with the stock at $100 the July 100 straddle is offered at about $1.80. If you bought that, and thus the move, you would need a move above $101.80, or below $98.20 to make money.
Price Action / Technicals: JNJ is down 4% on the year, and down 9% from the all time highs made late last year. JNJ is the largest, and worst performing holding in the top 10 weighted stocks in the XLV, the healthcare select etf, which is up 11% on the year.
The three chart below shows the stock’s recent downtrend from the late 2014 highs, having recently broken the uptrend that had been in place since the start of 2013, and a tad above key long term support at $96, the breakout level from late 2013:[caption id="attachment_55263" align="aligncenter" width="600"] JNJ 3yr chart from Bloomberg[/caption]
A failure at the downtrend here would likely result in a re-test of of the $96 level.
Valuation: JNJ trades about 16x this year and next year’s earnings growth of about 4%, despite consensus expectations for their first year over year sales decline (-5%) since 2010. The company has been managing costs well and buying back a lot of stock to offset what has been a crushing adverse effect of the strength of the dollar on the 55% of their sales that come from outside the U.S.
My View: JNJ suffers from the push and the pull of being considered part Consumer Staple and part Healthcare. While the stock has the relative cheapness and defensive nature of a large cap pharma and staple company, it also suffers from their exposure in emerging markets and regions where the dollar is very strong. While the 3% dividend yield appears to be attractive, with the yield on the 10 year treasury once again approaching 2.5% it may not be enough to offset the potential risks to growth.
In the near term I suspect that if results/guidance are not as bad as expected it would cause a pop to the 200 day moving average, up near $102 (green line). And a slight miss and mild guide down would cause a move back to just above last week’s lows near $98 (red line).[caption id="attachment_55265" align="aligncenter" width="600"] JNJ 1yr chart from Bloomberg[/caption]
Basically what I am saying that the implied move looks fair, but for those looking to pick a direction with long premium strategies into the print, options look cheap. The reaction to a beat and raise would likely outperform a move to the downside on a miss and guide down as the stock’s under-performance clearly demonstrates the existing poor sentiment.
Hypothetical bearish trade:
JNJ ($100) buy the July 100 puts for .90
Hypothetical bullish trade:
JNJ ($100) buy the July 100 calls for .90
It doesn’t get much more simple than that. The stock has been hovering around 100 for some time and the options reflect a view that that could continue. But those consolidations don’t last forever and the options market is at least giving traders the ability to take a shot for the stock to finally break from the range either way for less than 1% of the underlying.