Johnson & Johnson: Not the One to Go Down?

By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets

With the new season ahead, investors’ fears are fading out. The market is trying to find its bottom and bounce off it, if somewhat timidly. Few investors were bold enough to get into risks before the New Year, most preferred to lock in their hard-earned profits, which subsequently led to the overall downtrend.

There were some other reasons, too, though. The quarterly reports went better and better, which first was a good signal for keeping stocks within the portfolios. However, in Q4 2018, some companies were barely able to meet expectations, while others set their expectations way lower for the future periods. Facebook, for instance, was unable to meet expectations for two times in a row, despite the profits hitting the record highs. Meanwhile, Apple met expectations, but iPhone sales went significantly lower in Q4. General Motors revenues were completely based on automobile prices, while sales plunging, too. Some of these issues are due to the Sino-US trade war, but even without it the market would have gone down anyway, if at some higher price levels. Every company has its limit, and once it’s reached, a correction is inevitable. On the other hand, every company makes progress through innovative ideas, and when it manages to create a new unique product or service, its price goes drastically up.

Speaking of Facebook, Zuckerberg’s company multiplied its revenues more than threefold, from $4B in 2015, to $14B. Alphabet, the parent company of Google, succeeded in growing its revenues from $18B to $34B. Apple earnings are not growing as fast as Google’s, being very choppy, and it looks like the tech giant hit its iPhone sales limit. In 2015, Apple earned $58B, and had only 13% more by late 2018. The management finally opted for not disclosing the sales data, which had a very negative effect.

These figures do not look that impressive at first sight, and one may even think they could be way bigger. On the other hand, however, just think of it: a single US-based company earnings are bigger than the entire GDP in Bulgaria, Luxemburg, or Croatia.

Meanwhile, crude oil lost over 40% over the last three months. The stock indices, led by the S&P 500, followed in the same manner they had followed the rising crude price in 2017. This makes one think the indices will start rising as soon as crude finds support and bounces. Cheap crude is bad for exporters, while for other countries, it is a great tool, as producing nearly each and every product (or at least its packing or shipping) requires oil.

Whether crude has already found its support, or it will continue falling, remains to be seen. Investors are now interested in the crude and indices, but not that much so as to make the things really optimistic and push the prices higher. A fall is quite possible anyway, and the currently open long positions are under considerable risk.

When indices are going down, fear in the markets is so great that people sell even the stocks of the companies that are doing rather good. In order to provide the appropriate reasoning, the analysts usually remind the markets of a piece of negative news, even long-gone and forgotten. The stock then goes well bellow the oversold territory, just to give the investors a better opportunity to buy it later.

One of such oversold companies, with the stock price going down with no particular reason, is Jonson & Jonson (NYSE: JNJ), which includes over 250 child companies throughout the world. Johnson & Johnson produces medicines, hygienic products, and medical equipment. It was founded in 1887 by three brothers: Robert, James, and Edward Johnson.

Financially, the company is very much stable, and its earnings are rising steadily.

The chart below shows the earnings always beat expectations in 2017, which allowed the stock price to hit the historical high.

The price chart shows a very clear uptrend, with the price always being above the 200-day SMA, the latter acting as a support. In mid 2018, however, the stock lost as much as 20%, in a very short time frame. The earnings report was good, but the overall outlook was spoiled by the court decision, upon which J&J was fined at $4.70B.

The complainants affirmed that the baby dust produced by J&J contained asbestos, which may cause ovarian cancer. The similar trials had already been held in 2007, when the company first had to pay $417M to the injured US citizen, but later the decision was revoked, as no proofs for the event of crime were found. At that time, the market barely reacted at that legal action, probably because the amount was not that high.

It is quite high this time, though, so the news could not have gone unnoticed anyways. It was already priced into the stock in July 2018, however, as this is when the court took this decision. Ever since, the price went up again, and good earning reports pushed the price to the new all-time highs.

The ascending trend could well have continued, had it not been for the indices. Those fell considerably, and Johnson&Johnson was unable to stand ground. In order to justify the fall, the company remembered the legal action, which only made this fall steeper.

The situation was so grave that J&J had to announce it was going to buy the shares out for $5B, with the management considering the low price as an attractive investment opportunity.

Meanwhile, a recently concluded research, that had been in progress for decades, showed that American women living in the rural areas suffer from ovary cancer more often than those living in cities, although it is in cities when you find asbestos far more often. This means the connection between asbestos and cancer, if it exists, is not obvious.

Another research, however, highlighted that using amphibole asbestos led to the growing number of cases of occupational diseases. Amphibole asbestos is nowadays forbidden around the world.

The information on this research came roughly at the same time as the court decision on J&J. Nobody wanted to consider it all in detail, and which kind of asbestos it was about.

The whole story was so much overblown that each and every US citizen can now claim compensation from Johnson&Johnson. If this goes around the thousand of cities and towns J&J operates in, it could well lead to bankruptcy.

How you want to act in this market situation, remains up to you. You’ve got the crazy tumult on the one hand, and the logic on the other. The logic says the scandal is pretty much overblown, and those who initiated it are sure to lose in the end. Who is going to win then? Those who will control their emotions and take a weighted decision on buying the underpriced stock. This is because, now, the stock is far more likely to rise than to fall, both according to the overall situation and the fact that the trials started as early as in summer 2018.


Any predictions contained herein are based on the authors’ particular opinion. This analysis shall not be treated as trading advice. RoboMarkets shall not be held Company for the results of the trades arising from relying upon trading recommendations and reviews contained herein.

Having majored in both Social Psychology and Economics, I went on to continue my education in post graduate. Later I worked as a team lead of a tech and fundamental analysis lab in the Applied System Analysis Research Institute. This helped me to acquire all necessary skills and experience to become a successful trader and analyst, as well as a portfolio manager in an investment company. I'm a pro in the financial field and the author of articles for various international media. I also hold the position of Chief Analyst at RoboMarkets.