Analysis: JNJ

After you receive this Alert, we will be initiating a position in Johnson & Johnson (JNJ) , buying 300 shares at roughly $139.72. Following the trade, JNJ will represent 1.43% of the portfolio.

We are bringing JNJ out of the Bullpen and adding it into the portfolio. You can read our initial Bullpen alert on the company here. The company's 2017 Annual Report can be found at this site. Also, the company's Pharmaceutical Business Investor Call presentation can be found at this site.

 Our bullish thesis on JNJ is mainly predicated on:

  1. Ongoing strength in the Pharmaceutical Business which is expected to achieve above-market growth through 2021. The existing portfolio features blockbusters and "mega-blockbusters," the company has plenty of line extensions planned to boost sales, and the pipeline is robust. (see slides at bottom of page for more information).
  2. Management appears committed to reinvigorate its Medical Device segment. In the second quarter, JNJ's Medical Devices segment delivered its strongest growth since Q3 2016, putting the company on track for its goal to get its growth rate to above-market growth by 2020. The market's general preference for Medical Devices over Pharmaceutical could lead to multiple expansion down the road.
  3. Abating pressures from a strong dollar -- roughly half of the company's sales come from outside the United States, and currency was the main headwind on its recent full-year sales guidance update. We believe the dollar may have peaked, and future weakness in the dollar will help JNJ.
  4. Consistent, growing dividend yield -- the company has increased its payout for 55 consecutive years. The yield sits at around 2.58%.
  5. With strong free cash flow generation and a clean balance sheet, JNJ carries defensive-like qualities that we find attractive in a volatile market.
  6. Our desire to be bigger in the healthcare space is well-documented (see September members-only call here). We find healthcare attractive and think it could re-rate higher should investors flock to industries that are more immune to a global slowdown.

We are starting relatively small in JNJ, as we, of course, want to leave plenty of room to scale into the position over time. As always, we like to scale into our new positions in increments, and we welcome weakness as an opportunity to buy a stable, long-term holding at a cheaper price.

We are initiating the position with a $155 price target, which reflects roughly 18 times consensus 2019 earnings estimates. That being said, we believe there is more room for upside here in multiple expansion on strength in its new Pharmaceutical launches and if management expedites its Medical Devices growth through strategic M&A. And of course, we believe the consistent dividend pays shareholders for patience.

Action Alerts PLUS, which Cramer manages as a charitable trust, has no positions in the stocks mentioned.