Cut off Your Johnson & Johnson (JNJ)

by Dan February 24, 2017 1:52 pm • Trade Ideas

Shares of Johnson & Johnson (JNJ) are up 6% on the year, slightly out-performing the S&P 500’s (SPX) 5.4% ytd gains. Surprisingly the stock is up 10% (in what feels like a straight line) since issuing weaker than expected 2017 eps and sales guidance on their Q4 call in late January. Today the stock seemingly stopped on a dime at it’s Nov 9th post election explosion high. The one year chart below shows the potential resistance, but also the stock’s volatility since as the initial euphoria regarding the perception that an incoming Republican President and Congress would be less critical of drug pricing practices.

JNJ 1yr chart from Bloomberg

The sharp post election rise in the U.S. dollar served as a bit of a headwind for JNJ as the company gets about 47% of their sales from overseas, but the recent bounce appears to be related to the potential for cash repatriation as nearly 90% of their $40 billion in cash is overseas.

Taking a 5 year view, the December closing low of about $110 appears to be long term technical support, the 2014 high, and the early 2016 breakout level:

JNJ 5yr chart from Bloomberg

Shares of JNJ traded at 17.3x expected 2017 eps growth of 5%, an expected deceleration from the 9% eps growth in 2016, on an expected sales increase of 4%, a tad above 2016’s 3% yoy sales growth.

The next identifiable catalyst will be the company’s Q1 results confirmed for April 18th.  Short dated options prices have just bounced a bit from the 52 week lows, with 30 day at the money implied volatility  at 11.5%, up a couple percentage points in the last two weeks, but well below the June 52 week highs at 17.7%:


Given the uncertainty about campaign promises turning into policy with the new administration, it makes sense to look for trading opportunities to fade sharp moves like the one we just saw in JNJ, at obvious technical resistance.  In the short term a pull back to $115 could be in the cards, but $110 might be a decent target in a sort of perfect storm scenario where the market finally sells off, and the company were to once again issue downward guidance on April 18th. With short dated options prices so cheap, outright call or put purchases look attractive. If you think the stock could retrace some of the current move over the coming two months (including earnings) a simple put purchase makes sense.

So What’s the Trade?

bearish/ hedge

Buy JNJ ($122) April 120 put for 1.50

Break-Even on April expiration:

  • Profits: below 118.50
  • Losses: of up to 1.50 between 118.50 and 120, with max loss of 1.50 above 120.

Rationale: risk less than 1% of the stock price for a break-even down 3% in two months, a period that catches earnings. This is a fairly attractive risk reward for an outright bearish bet or protection against a long position.