Despite massive fallout from a major scandal that nearly took out the entirety of its 2019 gains, Johnson & Johnson has still managed to push itself 11% higher this year.
The stock has rebounded just about right up to its 2019 highs, and a big call from one of the big banks has investors asking a big question: Is Johnson & Johnson really the most undervalued stock in health care?
That’s what Morgan Stanley thinks, and it’s what at least one options trader believes, as well. In fact, this trader threw down $2 million in a bet that the stock is headed even higher.
“One trader who appears to like this Morgan Stanley call rolled a call position up and out,” Dan Nathan, founder of Risk Reversal Advisors, said Tuesday on “Fast Money.” “Today, when the stock was trading at $143, there was a seller of 6,000 of the [January] 140-calls to close.
“They used the proceeds of $6.05 or so [per contract] to buy 6,000 of the [February] 145-calls, paying $3.70 for those.”
As Nathan would point out, those calls break even if and when Johnson & Johnson hits $148.70, or about 4% higher than where it closed Tuesday. Since each contract is worth 100 shares of stock, this translates to a bet valued at about $2 million in premium.
That’s a very big wager on a stock that has run very far, very quickly.
“The stock is up 11% on the year,” said Nathan. “That’s all incorporated in this move over the last month and a half or so.
“If you believe the valuation story, this is the sort of name that, if you do have some of those headwinds – the regulatory stuff – out of the way, the stock should be moving higher.”
It’s not just valuation that makes the bullish case that JNJ’s run has the legs to go further, either, according to Nathan. The stock’s implied volatility, or the price of its options contracts, is near its lowest levels of the year, meaning that this $2 million bet might actually end up looking cheap in hindsight.
Johnson & Johnson was slightly lower Wednesday afternoon.
