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How to Trade J&J and P&G

We asked six investment advisors for their take on the different ways to playJ&J and P&G stock. Here's are their trading tips.
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NEW YORK (

TheStreet

) -- Depressed consumer sentiment and dourness on the economy has obviously been a drag on big household names like

J&J

(JNJ) - Get Johnson & Johnson Report

and

P&G

(PG) - Get Procter & Gamble Company Report

, along with big blue chip stocks in general. But some investors would argue that the two companies also have their own unique challenges, which are weighing on earnings and dampening investor confidence as well.

In addition, P&G's especially pronounced fall during the so-called, mysterious Dow "flash crash" in May has also inspired angst among fund managers.

Many feel that P&G just isn't in the right market right now; Goldman Sach's August data shows that P&G's sales were flat during the month, with sales weakness in laundry, tissue and batteries driven by price declines. Noteworthy also is that Moody's just issued a report warning that event risk in the consumer-products sector is elevated, carrying the potential for rating downgrades.

"Investment-grade consumer-products companies, by carefully managing cash and cutting costs through the economic downturn," have accumulated "ample dry powder" or "strong financial flexibility" for sizeable mergers and acquisitions, stock repurchases and shareholder dividends -- all of which Moody's categorizes as "special events" that could lead to "event risk" -- where a company's fundamental creditworthiness may decline sharply.

P&G is among the companies that Moody's believes has the least capacity to assume additional debt through shareholder payouts within current rating categories, and that the consumer behemoth fits the profile for "high shareholder-payout risk ... with fewer options to deploy its cash;" Moody's believes the company would likely resort to large share repurchases or dividend increases as a way of returning cash to shareholders.

Though P&G holds high cash balances and generates strong cash flows, its efforts to significantly improve profits are prevented by price competition in developed markets and its expansion into high-growth but lower-margin developing markets, Moody's explained. In fiscal 2008, P&G launched a $24 billion to $30 billion debt-financed share repurchase program with a total of $22.8 billion repurchased through March 2010, Moody's noted.

J&J meanwhile continues to face tough generic drug competition, pricing pressure in Europe, big recalls and the challenges of regulatory reform. With all this in mind, some investors have reduced their holdings in J&J, while others aren't putting money in P&G at all. Still, financial advisors,

while pointing out J&J and P&G's flaws, also note where the two can or are already making important improvements in areas of weakness

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and provide tips on how to approach playing or investing in these stocks.

Click on for different ways to approach investing in J&J and P&G, according to six investment advisors ...

Ken Shreve, Manager, TheStreet's Market Movers model portfolio

How to Trade or Invest in J&J and P&G:

J&J --

"From a technical standpoint, even though J&J's price performance has lagged the broad market this year, shares have rallied nicely of late. In fact, the stock is now in an uptrend after recently breaking out above an upper channel line. With the broad market acting better, the stock is still within buying range around $60.32 but might face a little more selling pressure at its recent high of $61.73. A move above this level with volume would be another bullish development."

P&G --

"This is a classic defensive play, similar to Johnson & Johnson. But defensive plays often have a hard time growing due to mature businesses and this is the case with P&G. Recent price and volume trends in its chart tell me there's been a lot of institutional selling in the stock in recent months and it's sluggish price performance tells me that investors aren't all that excited about future growth prospects."

J&J, P&G: A Tale of Two Disappointments And Improvements

"This is a tough stock to trade because it's slow moving. It seems as if institutional investors are in "wait-and-see" mode about whether McDonald can make inroads when it comes to building business in developing markets. The stock still has a ways to go before it gets to its prior high of $63.36. One thing's for certain: for a new uptrend to begin in earnest, it'll take a new round of institutional buying and it hasn't been happening lately amid newfound strength in the broad market."

Stephanie Link, Director of Research & Vice President of Strategy, TheStreet.com

How to Trade or Invest in J&J and P&G:

J&J --

"Shares aren't expensive at 11.9 times earnings, but for 6% growth isn't particularly appealing either (even with the 3.6% dividend yield). Especially since

Abbott Labs

(ABT) - Get Abbott Laboratories Report

trades 11.1 times and yields 3.4% with 10.4% earnings growth. We chose Abbott over J&J and will watch J&J's execution, response to the recalls and

wait for its young pipeline

to age further before taking another look."

J&J, P&G: A Tale of Two Disappointments And Improvements

P&G --

"From a trading perspective, we started buying

P&G at $51 so we're up nicely on the position and have been locking in some gains although it's a long term core bet for us. Shares are not expensive at 15 times forward estimates (below the 19x average) and the dividend is attractive -- particularly since it will continue to grow over time. We own it as a nice hedge against the beta we have in the

Action Alerts Plus fund."

Ryan Detrick, Senior Technical Strategist, Schaeffer's Investment Research

How to Trade or Invest in J&J and P&G:

"They're names that aren't that volatile, so if you're talking to an active trader, these are probably names they would stray away from. But if someone is looking for a trade, I would do some kind of a pair trade with another stock or specifically with another stock in the sector -- that makes a lot of sense cause that way you're kind of hedged -- just make sure all your basis are covered.

"We deal with options and one way to potentially do it is if you buy or are holding the stock, you can purchase put options -- for example some longer-term puts or bearish bets, and that's a nice way to potentially hedge yourself. If the whole market crashes again ... that's a good way to protect your investment if you're a trader. You can buy leap options -- something that expires in January. That way you can have some insurance should anything bad happen up until January -- that way you'll be covered. You'll profit on your puts. Yeah -- you're stock will be down, but you'll be covered to a degree on your puts. You can do those with either P&G or J&J because they definitely have those options on them."

J&J, P&G: A Tale of Two Disappointments And Improvements

"The

Consumer Staples Select Sect. SPDR (ETF)

(XLP) - Get Consumer Staples Select Sector SPDR Fund Report

ETF -- that's similar to P&G specifically. That's one way where if you were to play P&G, you could pair it up with some put options on the XLP. The XLP is a really nice way to play a hedge in the consumer staples area.

"J&J does a little bit of everything so it's tougher to pin down what they do. But J&J does some healthcare, obviously, so the

Health Care SPDR (ETF)

(XLV) - Get Health Care Select Sector SPDR Fund Report

is one ETF you could potentially pair J&J with. It's a little tougher to classify J&J -- except of course that it's a big blue chip name. So from that point of view, puts on the

SPDR Dow Jones Industrial Average ETF

(DIA) - Get SPDR Dow Jones Industrial Average ETF Report

may be one form of protection if you are long J&J."

Frank Ingarra, Co-Portfolio Manager, Hennessy Funds

How to Trade or Invest in J&J and P&G:

J&J --

"J&J is in our large-cap growth process based on its low price to cash flow; "Dogs of the Dow"

status and return on total capital. For our large-cap growth formula we start with market cap greater than the average -- really large companies; then they must have a price-to-cash-flow less that the median of a database. Basically, we're looking at undervalued companies that have good cash flow numbers. Then they have to have positive total capital. Then we select the 50 stocks with the highest one-year return on total capital. Return on total capital is a good measurement of how well a company is utilizing its limited resources to maximize growth or how management's allocating the company's balance sheet to help the business grow.

"So J&J was one of the fifty stocks. This is one where we have a non-dividend strategy, which is kind of interesting -- to have a large-cap, well-known dividend-paying company in a growth fund. It's a blended strategy."

P&G --

"We don't own P&G in our funds because it's not yielding enough. It wasn't the top 50

of our large-cap growth fund. If you go down the list,

Verizon

(VZ) - Get Verizon Communications Inc. Report

and

AT&T

(T) - Get AT&T Inc. Report

are the top two, and they're both yielding over 6%, whereas Procter & Gamble is right now yielding 3.19%. P&G is just not fitting with any of our models."

Brian Gilmartin, CFA, RealMoney Contributor and Founder and Portfolio Manager, Trinity Asset Management

How to Trade or Invest in J&J and P&G:

"I actually think it would be a much harder job to trade them than it is to just sit with them. These are 'one decision stocks' that tend to do well in bull markets because their P/Es tend to expand. In other words they generate consistent earnings growth. The market starts to value that consistency and higher price/earnings ratio simply because it is consistent. I think they're better buy-and-hold stocks.

"Still, they're both high end brands, particularly P&G, and that's not the market to be in right now; they requires a patient investor in my opinion."

J&J --

"I've still got some J&J, but a very small position relative to what I did own. And I'd wait until I hear management say we're going cut our expenses by 5% or 10%. The stock will jump and will likely retrace some of the gain, and that's when I jump in. Right now it's trading around $60. I'd love for it to get lower, to the low $50s -- I don't know if that'd ever be possible.

"I own a very small amount of J&J. I don't think it kept pace with the rally in 2009 so there were performance issues there. I sold it gradually. When I'm looking to get out of something and notice I can get out of it at a gain -- even if it's just a small gain -- I'll still get out of it. "

J&J, P&G: A Tale of Two Disappointments And Improvements

P&G --

"We don't own P&G. And I was hoping it'd get lower. We did own P&G -- not a lot, though. I got out before they had their latest trip down. They've got a lot of goodwill on their balance sheet because of their acquisitions. It's not necessarily a bad thing for us, but it's something that we don't like to see.

"The stock always did sell at an earnings multiple premium, simply because it would do well in a decent market because investors the P/E would expand. They've run into problems now that their P/E's have compressed.

"The technicals on a weekly basis don't look that bad. The stock is heavily oversold. It is as oversold now as it was in early 2009. So that's maybe good for a trade."

Roger Volz, Technical Analyst, BGC Partners

How to Trade or Invest in J&J and P&G:

In answering the question of what J&J and P&G could be paired up with for a trade, Volz said one would normally find long-short activity done with issues of same sector. P&G and

Clorox

(CLX) - Get Clorox Company Report

; P&G and

Kimberly-Clark

(KMB) - Get Kimberly-Clark Corporation Report

; and P&G and

Colgate-Palmolive

(CL) - Get Colgate-Palmolive Company Report

are examples. "But the expansion of ETF trading might see pairs consisting of buying the sector ETF and selling the underperforming issue, which could be the case with both P&G and J&J these days," Volz said. "One approach for these issues would be on a value basis or yield basis for dividend returns. I'd couple these stocks with call options to enhance their returns. Of technical interest is J&J has recently completed a 50% retracement of the 2009 trough to 2010 peak."

-- Written by Andrea Tse in New York.

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