Johnson and Johnson May Rise 7% Amid Strong Growth

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Johnson and Johnson’s (JNJ) stock has been on a hot streak since late May with the shares rising by almost 16%. Options traders and technical analysis suggest the stock could continue to increase over the coming months by as much as 7%. Should that happen, it would amount to a surge in the shares of almost 24% since the May lows. 

Part of the reason investors are growing more bullish on the stock is its attractive valuation and robust growth forecast in 2018. (See: Johnson & Johnson's Breakout May Boost Stock 11%.)

JNJ data by YCharts

The technical chart suggests the stock can rise to around a price of $148. That is back to the highs in late January. The stock is now resting above an uptrend at $137 while also trading above a technical support level around that same price. Should the stock continue to rise along its uptrend, it should have a clear path to continue to rise to $148.50 an increase of about 7.3% from its current price of around $138.50

The relative strength index has been trending higher in recent months. It suggests that bullish momentum is continuing to move into the stock.

Options traders are betting the stock will rise by about 4% by the middle of January. The number of bets the stock increases outweighs the bets the shares will fall by over 2 to 1. There are about 6,600 open calls at the $140 strike price, and a buyer of those calls would need the stock to rise to at least $144 to earn a profit if holding the calls until expiration.

Fundamental Chart data by YCharts

One reason for the optimism in the stock is that analysts see earnings rising by over 11% in 2018 while revenue is forecast to grow by over 6%

The bad news is that analysts are predicting earnings growth to slow in 2019 to just 6% on revenue growth of less than 3%. It leaves the stock trading with a 2019 PE ratio of about 16 which is almost three times the stock’s 2019 earnings growth rate giving it a PEG ratio of 2.7.  However, the stock has traded with a one-year forward PE ratio between 14 and 18 since the start of 2015 putting its current valuation right in the middle of that range. (See: Why J&J’s Fallen Stock Is Still Too Pricey.)

The short-term outlook suggests the stock can continue to rise given an attractive valuation and strong 2018 growth. But slowing growth in 2019 poses as a longer-term problem.  

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.