Tuesday, April 14, 2009

Johnson & Johnson -- JNJ

we should have a close eye on how JNJ moves with the earnings release this morning. I'm not so concerned with whether the company does or does not meet expectations. my interest is more in what adjustments will be made, if any, to the share price in comparison to the new earnings numbers. how the market values JNJ from tomorrow forward will be very instructive for our view of the valuations structure of the market as a whole.

with a P/E of 11 and a yield of 3.6%, the company can be considered the epitome of current equity valuations. it is pretty typical of what investors are willing to pay for earnings. my hunch is that over time the P/E of the S&P 500 index as whole (currently at 12.66) will gravitate towards the prevailing P/E of JNJ. companies valued higher than JNJ will tend to see their P/Es deflate towards that of JNJ, while concerns that currently sport lower valuations will likely see further P/E reflation, particularly if they can prove their profitability the next couple quarters.

relative to the S&P, JNJ has been in a downtrend since the market bottomed last month. in fact, the ratio has mirrored the broader market pretty consistently the past couple years. so maybe the next turn in the ratio can provide us a clue as to when the overall market will shift direction.

the ratio is probing important support now, but if this doesn't hold then it will most likely approach that moving average on the chart.