This may be getting old by now, asking yourself questions like why does Johnson & Johnson (JNJ) trade at 18x expected 2016 eps? Yeah defensive (medtech, pharma & shampoo) with that buyback and 2.66% dividend yield, but with expected eps growth of 8% in 2016 (which in the first half was tracking at 5%) some serious earnings wood needs to be chopped on 3% expected annual sales growth…
JNJ is up 17% ytd, more than 2x that of the S&P 500 (SPX), and just 4% from an all time high made in late July.
The next identifiable catalyst for JNJ will be their Q3 results that should fall in Oct expiration. As we head into the Fall with looming issues like the potential for the FOMC to raise interest rates and the results of the presidential election, I suspect at some point between now and early November we could get some sort of vol shock, and it could make sense to look for cheap vol in crowded names. This maybe the case in JNJ. Remember, defensive stocks are defensive until they aren’t. Last August, as the market melted down, JNJ had about a 20% drop in less than a week from $100.
Let’s draw some lines. From the 52 week lows the uptrend is certainly healthy, but the stock could be at a precarious spot near term:[caption id="attachment_65763" align="aligncenter" width="600"] JNJ 1yr chart from Bloomberg[/caption]
Stretching things out a bit, it becomes clear that a pullback to the prior breakout level at $110 is not entirely out of the question:[caption id="attachment_65761" align="aligncenter" width="600"] JNJ 2yr chart from Bloomberg[/caption]
So What’s the Trade?
Even with vol so low and the stock looking like it may be rolling over it’s maybe no necessary to reach for out of the money put spreads just yet with the market in such boring doldrums. We’ll see how the stock reacts here and try to patient, but here is what we like as far as playing an uptick in vol and a pullback in JNJ. The first trade idea is in October, the 120/105 put spread for 2.50 has a break-even not far from here at 117.50 and can be worth up to $15. Looking out a bit more, the Jan 120/100 put spread is 4.00, it has a break-even at 116, can be worth up to $20 and gives itself 3 more months time than the October idea.
JNJ could be rolling over since its late July earnings highs and that may be saying something about impending rotation. We’ll keep an eye on it and get a sense of when the market is more out of what seems like an extended Holiday trading.