Johnson & Johnson's Breakout May Boost Stock 11%

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

Johnson & Johnson's (JNJ) shares are poised to head higher, with analysts looking for the stock to climb by over 11%. A technical analysis of the chart also suggests the stock may rise by over 7% in the coming weeks. The stock has had a tough time in 2018 with shares down by over 8% for the year and nearly 14% off their highs. 

The steep decline in the stock has left shares undervalued versus its historical trend with the stock trading at its lowest P/E multiple since early 2016. 

Stock Breaks Out

The technical chart shows that Johnson & Johnson's stock is breaking out after clearing a critical technical downtrend that has been in place since December. The next level of significant technical resistance doesn't come until roughly $137, a rise of about 7% from its current price of around $127.50. 

A 12% Gain

Analysts are looking for the stock to climb even higher: by about 12% to $141.80. But analysts have reduced their average price target by about 3% since the start of the year. Of the 24 analysts that cover the stock, 50% rate shares at buy or outperform. 

JNJ Price Target data by YCharts

Cheap Valuation

Another positive for the stock is its cheap valuation trading at roughly 15 times 2019 earnings estimates, which is lower than the S&P 500 P/E of approximately 17. The stock's current earnings multiple is historically at the lower end of its range, trading at a level not seen since the start of 2016. 

Fundamental Chart data by YCharts

The company is expected to report solid second-quarter results on July 18 and analysts are looking for the company to post earnings growth of nearly 13%, while revenue is expected to grow by 8%. The full-year outlook for the stock looks almost as strong, with earnings seen climbing by about 11% and revenue seen jumping by over 6.5%. 

The current stock valuation and the bullish  momentum in the stock appear to be reason enough to warrant the stock's rise going into results based on the forecast. But the company is going to need to deliver strong results when it reports to keep that bullish momentum moving higher. 

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.