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Johnson & Johnson Faces Criminal Probe on Baby Powder

Posted: 15 Jul 2019 03:00 AM PDT

Shares drop as DOJ pursues criminal investigation.

On Friday, Johnson & Johnson (JNJ ) shares dropped by nearly 5 percent in trading. The drop occurred as news developed that the Department of Justice was pursuing the company criminally over claims that it misled the public about possible cancer risks stemming from asbestos in its talcum powder products.

While the company has repeatedly denied any wrongdoing, it currently faces thousands of lawsuits from consumers attributing their cancer to use of J&J products.

With thousands of products, baby powder only accounts for a small fraction of J&J's revenue. However, cancer-related lawsuits are highly sympathetic with juries, and thus could disproportionately impact the company's profitability while they play out.

Action to take: With the rising uncertainty around shares now, investors could look for an entry point to build a long-term stake in an otherwise great company facing short-term legal headwinds.

The company trades at 15 times forward earnings, a sizeable discount to the average S&P 500 stock right now. And the company has remained profitable and managed to grow even as these lawsuits have unfolded.

For the time being, investors should look to start building a stake should shares fall farther, say under $125. With a 52-week low of $120, such a price would be close to oversold levels based on the latest news.

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U.S. Refiners Struggle Ahead of Tropical Storm Barry

Posted: 15 Jul 2019 03:00 AM PDT

Potential hurricane threatens refinery-rich Gulf of Mexico.

Although a tropical storm as of Friday, forecasters warned that Barry may strengthen to a category 1 hurricane before making landfall in Western Louisiana or Eastern Texas over the weekend.

Over 25 inches of rain are expected in the New Orleans area alone, and flooding was already occurring in low spots as early as Wednesday.

The Gulf of Mexico is a major area for oil exploration and drilling, but it is one of the most critical regions for refining crude oil into gasoline and other products.

So even if the storm stays below hurricane strength, considerable cutbacks in oil and gasoline supply could occur in the coming weeks.

Ahead of the storm, most refineries were taking steps to stay open and continue operating to guarantee a steady supply of gasoline and other products in the coming weeks.

Exxon Mobil reported that it plans to run its Baton Rouge facility, which refines 502,000 barrels per day. Royal Dutch Shell has two refineries in Louisiana, and also intends to keep the facility running.

Not all refiners expect to stay open. Phillips 66 reported that it would shut down its refinery in Alliance, Louisiana, which produces 253,000 barrels per day. Overall, most refineries have some plan to stay open, although their total capacity may be reduced depending on storm damage.

Insider Activity: Francesca’s Holdings Corporation (FRAN)

Posted: 15 Jul 2019 03:00 AM PDT

Large fund owner more than doubles stake.

On Thursday, Cross River Capital Management more than doubled their stake in Francesca's Holdings Corporation (FRAN). They did so by buying 341,973 shares of the retailer, shelling out over $625,000.

As the trade occurred below market rates, the additional number of shares was achieved off-market, and likely the result of the fund's prior debt investments in the company converting to shares at a lower rate.

Francesca's is a boutique apparel retail company with 727 boutiques in 47 states. The company is focused on gifts for women between the ages of 35. The company is currently running at a loss, and has over $275 million in debt against a mere $11 million market cap for shares.

Action to take: Physical retail operations can be tough—and this looks like no exception. With this company's particularly heavy debt load, investors would be better to avoid shares rather than buy here.

Changing debt to cash, as seems to be what the company's major fund investor is doing, can help the balance sheet, but it does so in a way that dilutes shareholders. So even if the company survives, shareholders may not see any capital gains in this company for the foreseeable future.

Unusual Options Activity: Tenneco Inc (TEN)

Posted: 15 Jul 2019 03:00 AM PDT

Big bet auto parts supplier will decline.

A sizeable bet is being made on a double-digit drop in shares of Tenneco (TEN) between now and January.

On Friday, nearly 3,000 contracts traded on the $9.00 put option on the company. With shares at $9.50, the option is a bet that shares will decline. Based on the price of the option around $1.45, shares will need to trade around $7.50 by January for the option to be worth at least as much as it is today.

Tenneco designs, manufactures and sells automotive parts for light vehicles and commercial trucks to customers worldwide. It makes a number of products with environmental friendliness in mind, from clean air systems to powertrain, and even ride performance products.

Shares of Tenneco rallied by over 9 percent on Friday, following a buyout offer on competing automotive supply firm Tower International. So the options bet is likely an assumption that there will be no other M&A activity in the space, and Friday's pop in shares will eventually come back down.

Action to take: Short-term rallies based on the merger offer between two competing companies tend to die out over time. That makes this option buy one that will likely be profitable in the coming months, but traders may want to look to take profits on a down day for shares rather than hold the option as long as possible.
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