Johnson & Johnson is undervalued

Posted Nov 30th 2009 3:40PM by Joseph Lazzaro
Filed under: Johnson and Johnson (JNJ), Stocks to Buy

I'm reiterating my buy rating for Johnson & Johnson (JNJ), first recommended on May 20, 2009 at a price of $55.87.

Much-maligned JNJ is on the mend: look for revenue growth in the company's pharmaceutical unit, despite some sales erosion to generics. Meanwhile, new orthopedic and cardiovascular products should help the company's medical device unit perform adequately in 2010. The key wildcard? Consumer product sales: personal care products face rough sledding due to the recession-induced reduction in U.S. households and the 'frugal consumer' trend. But the latter two are not enough to blot out the positive overall story.

The First Call FY2009/FY2010 EPS estimates for JNJ are $4.58 to $4.93.

Technically, JNJ's stock chart is strong – an uptrend. The stock cleared psychological resistance at $50 in June, then $60 resistance in August, and has remained above the key 50-day moving average, essentially since May. JNJ will encounter 2-year resistance at/near $70, but this should prove to be minor. JNJ is headed north.

Stock Analysis: Johnson & Johnson is a moderate-risk stock. If you've already purchased the company's shares, hold them. If not, consider buying a 25% position in JNJ now; then buy another 25% in one month, if U.S. and global economic conditions don't worsen substantially. Under any circumstance, don't buy more than 75% of your JNJ position before February 2010. Sell/Stop Loss if you were to buy shares in this company: $36.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

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