Buy the Earnings, Not the Uncertainty

Markets hate uncertainty. An increase in uncertainty is a nearly guaranteed way to ensure that a company’s shares decline. Big uncertainties about the economy or geopolitical events can rattle the markets.

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  • The reverse is also true. Investors pay up for certainty. That’s a premium that investors can avoid by buying great companies when they’re still contending with uncertainty. One way to avoid uncertainty is to look at facts of a company that are certain, starting with its earnings.

    In particular, the trend of a company’s earnings growth can show a business that’s on the upswing, even if markets are fearful.

    Medicine and health product manufacturer Johnson & Johnson (JNJ) is a perfect case in point. The company just beat again on earnings. The stock is reasonably valued at 14 times forward earnings.

    However, uncertainty over talc-related lawsuits is keeping a lid on shares. As with many big corporate lawsuits, they tend to get settled and create certainty in time.

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  • Action to take: Investors who buy now can get shares well off their recent peak. And they’ll likely see more upside in time thanks to strong earnings and the eventual end of the talc-related lawsuits. It may be prudent to buy a partial position now, and add to that stake on any positive news.

    At current prices, JNJ also pays a 3.2% dividend.

    For traders, the short-term downtrend is still lower. The July $130 puts, last trading for about $1.15, could see mid-double-digit returns on a further decline.


    Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.

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