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Johnson & Johnson Downgraded On Hefty Valuation Compared To Peers

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Johnson & Johnson Downgraded On Hefty Valuation Compared To Peers

Analysts at Goldman Sachs turned bearish on industry giant Johnson & Johnson (NYSE: JNJ) amid valuation concerns. Analyst Jami Rubin downgraded J&J's stock from Neutral to Sell with a price target boosted from $125 to $130, which implies downside from Wednesday's open of $133.25.

The decision to turn negative on J&J's stock is largely based on relative value, the analyst explained. Specifically, the company has been one of the largest beneficiaries of an ongoing rotation into defensive categories like the broader healthcare sector. Since July of 2015, shares gained 37 which marks outperformance versus the S&P 500 index (up 21 percent), the healthcare ETF, Health Care SPDR (ETF) (NYSE: XLV) (up 9 percent), and other large-cap pharma stocks that are higher on average by 6 percent.

As such, there's a risk that investors will be rotating into other pharmaceutical stocks, especially those that boast a more attractive product cycle, Rubin suggested. As for J&J, the company has a lack of optionality for value creation versus its peers, especially in terms of high value pipeline assets, transformative M&A and operating leverage.

Investors may be better off buying shares of AbbVie Inc (NYSE: ABBV), Bristol-Myers Squibb Co (NYSE: BMY) and/or Eli Lilly and Co (NYSE: LLY), the analyst suggested. These three companies are attractive for their "more identifiable, needle moving catalysts."

Bottom line, J&J's below-average, long-term growth outlook implies that its valuation today is "stretched."

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Latest Ratings for JNJ

DateFirmActionFromTo
Dec 2020Morgan StanleyMaintainsOverweight
Oct 2020Cantor FitzgeraldMaintainsOverweight
Oct 2020Credit SuisseMaintainsOutperform

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