Has Johnson & Johnson Peaked? Time to Book Profits?
Initially, I can see why as it pays out a nice dividend yield in a business that should remain stable over the long-term. However, you should be careful about the price you pay for the safety.
What we're trying to do here at BehindWallStreet.com is provide information that you can incorporate in your investment strategy that can help increase the probability of long-term success.
There are several reasons why Johnson & Johnson has come to our attention. The first is simply valuation. The company trades with a trailing P/E of over 20, and a forward P/E of almost 16 even though revenues are set to grow in the high single digits.
We estimate revenue growth next year to be in the range of 5%-7%, with earnings slightly above that at our estimate of 8%-10%. These are not bad numbers, but certainly not worth paying a premium.
What we've experienced over the past year in a stock like Johnson & Johnson is multiple expansion. This occurs when the price-earnings ratio increases, as investors are willing to pay a higher price for each dollar earned.
If a stock is trading at a trailing price-to-earnings ratio of 20, yet growing at less than half that, what's the upside as an investor? Do you really believe it will trade at 30 times earnings? We certainly don't.
In addition, with the Federal Reserve about to start shifting monetary policy, this will cause interest rates eventually to move up, lowering the value of the current dividend yield. Meaning, the stock will need to move down to make the dividend yield more attractive.
Were not alone in thinking that Johnson & Johnson might be topping out for the year, as we've seen a large number of call sellers at the October $95 strike price. This means that investors believe there is little chance that the price will move significantly above $95 by this fall.
Taking a look at this chart and it clearly shows the massive move up for Johnson & Johnson over the past year. This entire move is for company that is not exactly ‘high growth’. Yes, the company is stable and will grow at a decent rate, but at this point we would certainly take profits and wait for a more attractive price point.
Whenever you make an investment decision, always think about what is a reasonable value to pay for the stock. If you bought shares today, do you really believe they will continue growing at the same rate that we witnessed over the past year? We don't think so, and we would urge caution in stocks such as Johnson & Johnson.
If you would like to know how we would create a trading strategy using companies like JNJ, then check out our Flagship Newsletter or the Aggressive Investor Newsletter. If you would like to know how we would create a trading strategy for ETF's, then check out the ETF Total Return Newsletter.
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The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.