Talc Lawsuits Keeping Lid on Johnson & Johnson (JNJ)

Dow component Johnson & Johnson (JNJ) is due to report third quarter 2020 earnings in Tuesday's pre-market, with analysts expecting earnings per share (EPS) of $1.98 on revenue of $20.15 billion. The stock barely budged after the company beat second quarter estimates and raised guidance in July, and it is now trading just three points higher. More importantly, the stock has gone absolutely nowhere since recovering first quarter losses in April, stuck in a trading range between $135 and $155.

The drug manufacturer has been a Dow laggard since topping out above $148 in January 2018, adding just four points between then and now. A generous dividend yield has eased shareholder pain while the company works through 19,000 lawsuits alleging illnesses caused by its talc-based Baby Powder. Bloomberg just reported that Johnson & Johnson will pay over $100 million to end over 1,000 legal actions, telling us that the company will be dealing with this headwind for years to come.

Johnson & Johnson is also developing a COVID-19 vaccine, reporting good results in a Phase 2 clinical trial in September. However, the CEO recently stated that a commercial vaccine isn't likely until next year, even though competitors will be rushing their compounds to market to increase acceptance and profitability. It's hard to tell if the tortoise or the hare will win this battle, given the high risk of rejection by a skeptical public.

Wall Street is showing little interest in the lawsuits, posting a "Strong Buy" rating on Johnson & Johnson shares based upon seven "Buy" ratings, with no "Hold" or "Sell" recommendations. Price targets currently range from a low of $158 to a Street-high $175, while the stock opened Monday's session $6 below the low target. This out-of-sync placement indicates that analysts have failed to address the long-term impact of legal actions on Johnson & Johnson's bottom line.

Johnson & Johnson Long-Term Chart (2005 – 2020)

A multi-year uptrend topped out near $70 in 2005, marking a resistance level that denied progress until a 2013 breakout. The stock posted impressive gains into 2014 and sold off to a two-year low in 2015, ahead of a fresh breakout in May 2016. The rally topped out in the $140s in January 2018, giving way to a volatile period that has posted slightly higher highs and slightly lower lows. In turn, this has generated a bearish broadening formation, better known as a megaphone pattern.

Johnson & Johnson Short-Term Chart (2017 – 2020)

The on-balance volume (OBV) accumulation-distribution indicator posted new highs in 2017, 2018, and January 2020, ahead of a distribution wave that ended at a 13-month low in March. The stock recouped its losses into April, but OBV barely budged, exposing weak interest that set off a major bearish divergence when price lifted to an all-time high on April 23. The rally then failed while the indicator drifted into a sideways pattern that still hasn't mounted the midpoint of the first quarter swoon.

Price action since April has carved the outline of a potential symmetrical triangle that is now engaged in a fourth wave. A rally above $156 would improve the technical outlook in this configuration, but a downdraft looks more likely because this pattern usually draws five waves before ejecting into a new trend, higher or lower. OBV could offer early clues in this regard, with a surge over the April peak signaling more committed buying interest.

The Bottom Line

Johnson & Johnson stock has been stuck in a trading range since January 2018, with third quarter earnings unlikely to trigger a breakout or breakdown.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.