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By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets
With the new season, investors' fears are fading. The market is trying to find its bottom and bounce it, if a little shyly. Few investors were brave enough to put themselves at risk before the new year, most preferred to lock the hard earned profits, which led to a general downtrend.
There were also other reasons, though. The quarterly reports have been getting better and better, which was a good signal, first of all, to keep stocks in the portfolios. However, in the fourth quarter of 2018, some companies were barely able to meet expectations, while others lowered expectations for future periods. Facebook, for example, has not been able to meet expectations twice in a row, although profits have reached historic highs. Meanwhile, Apple has met expectations, but iPhone sales have declined significantly in the fourth quarter. General Motors' revenues were completely based on car prices, while sales also collapsed. Some of these problems are due to the Sino-American trade war, but even without it the market would have fallen anyway, if at higher price levels. Every company has its limit and once achieved, a correction is inevitable. On the other hand, every company progresses through innovative ideas and when it manages to create a new product or service, its price increases dramatically.
Speaking of Facebook, Zuckerberg's company has multiplied its revenue more than three times, from $ 4 billion in 2015 to $ 14 billion. Alphabet, the parent company of Google, has managed to grow its revenues from $ 18 to $ 34 billion. Apple's earnings are not growing as fast as Google's, being very moved, and it seems that the tech giant has reached the iPhone sales limit. In 2015, Apple earned $ 58 billion and only 13% more at the end of 2018. The management finally opted not to disclose the sales data, which had a very negative effect.
These figures do not seem so impressive at first sight, and one might think that they could be much larger. On the other hand, however, just think: a single profit of companies in the United States is larger than the entire GDP in Bulgaria, Luxembourg or Croatia.
Meanwhile, crude has lost over 40% in the last three months. The equity indices, led by the S & P 500, followed in the same way as they had followed the rising price of crude in 2017. This suggests that the indices will begin to rise as crude oil will find support and rebound. Economic crude hurts exporters, while for other countries it is an excellent tool, since producing almost every product (or at least its packaging or shipping) requires oil.
It remains to be seen whether crude has already found its support, or will continue to fall. Investors are now interested in crude oil and indices, but not so much to make things really optimistic and push prices higher. A fall is however possible and the long positions currently open are at considerable risk.
When the indices are falling, the fear in the markets is so great that people also sell the shares of the companies that are doing pretty well. In order to provide the appropriate reasoning, analysts usually remind the market of negative news, even if long since forgotten. The shares then go well under the oversold territory, just to give investors a better opportunity to buy it later.
One of these oversold companies, with the price of shares falling for no particular reason, is Jonson & Jonson (NYSE: JNJ), which includes more than 250 companies of children all over the world. Johnson & Johnson produces medicines, hygiene products and medical equipment. It was founded in 1887 by three brothers: Robert, James and Edward Johnson.
From a financial point of view, the company is very stable and its earnings are constantly increasing.
The graph below shows that earnings have always exceeded expectations in 2017, which has allowed the stock price to reach its all-time high.
The price chart shows a very clear uptrend, with the price always above the 200 day SMA, the latter acting as a support. In mid-2018, however, the stock lost up to 20% in a very short period of time. The earnings report was good, but the overall outlook was ruined by the court's decision, on which J & J was fined $ 4.7 billion.
The complainants claimed that the infant powder produced by J & J contained asbestos, which can cause ovarian cancer. Similar tests had already been held in 2007, when the company first had to pay $ 417 million to the injured US citizen, but later the decision was revoked, as no evidence was found for the crime event. At that time, the market was barely reacting to such legal action, probably because the amount was not so high.
This time it is quite high, so the news can not have gone unnoticed. It was already priced in July 2018, however, since this is the moment when the court made this decision. Since then, the price has risen again, and good earnings have pushed the price to new historical highs.
The upward trend could have continued, had it not been for the indices. Those fell considerably and Johnson & Johnson was unable to resist. To justify the fall, the company recalled the legal action, which only made this fall steeper.
The situation was so serious that J & J had to announce that it would buy the shares for $ 5 billion, with the management considering the low price as an interesting investment opportunity.
Meanwhile, a recently completed research, which had been under way for decades, has shown that American women living in rural areas suffer from ovarian cancer more often than those living in cities, even if it is in cities when 39; asbestos much more often. This means that the connection between asbestos and cancer, if it exists, is not obvious.
Another research, however, has highlighted that the use of amphibole asbestos has led to the growing number of cases of occupational diseases. Amphibole asbestos is nowadays banned all over the world.
The information on this research arrived at about the same time as the court's decision on J & J. Nobody wanted to consider everything in detail and the type of asbestos in question.
The whole story was so exaggerated that every US citizen can now claim compensation from Johnson & Johnson. If this goes around the thousands of cities and cities where J & J operates, it could very well lead to bankruptcy.
How you want to act in this market situation, it depends on you. You have the crazy tumult on one side and the logic from the other. The logic says that the scandal is practically exaggerated, and who started it is sure to lose at the end. Who will win then? Those who will control their emotions and make a weighted decision on the purchase of below-cost shares. This is because, now, the stock is much more likely to rise rather than fall, both on the basis of the general situation and the fact that the tests started as early as summer 2018.
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Any provision contained in this document is based on the particular opinion of the authors. This analysis should not be treated as a trading advice. RoboMarkets will not be held responsible for the results of trading resulting from the business recommendations and reviews contained in this document.
