Subscriber Correspondence: In this week’s update you mentioned that Novo Nordisk is “something of a gold standard from a pounce pile perspective” and “that although attractive, NVO isn’t quite there yet when it comes to considering purchase.” Could you elaborate on these statements? Please help me to see what you’re looking at and why. Thank you.
Thanks for the question.
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… and Now, On With Novo Nordisk (NVO)
With similar comments and requests from a few of you, this seems like a good opportunity to expound and explain.
Let’s start with the pounce pile comment. As most of you know, I no longer feel the same way. Pounce piles were a reference to a group of stocks that we’d like to own — kept in some form of a watch list several years ago. (In many cases, the watch lists were on paper, index cards and the sort … and generally were the result of performing a study that displayed an exceptional company but with an insufficient return forecast at the time of the study.) The companies on our index cards generally seemed to be industry leaders, quite often brand champions. They often exhibited leadership growth and profitability at the same time.
Hence, what we were really hoarding and hoping for buying opportunities were discoveries of high-quality companies.
And this is the essence of why I think watch lists (particularly index card versions) are now obsolete. Because we can now generate a list of the highest quality companies with a few key strokes.
First, let’s take a look at the quality rating track record of Novo Nordisk (NVO) using a chronicle.
This is a time series look back at the last few years (monthly) with a display of quality, return forecast (PAR) and stock price.
Keep in mind that any quality rating greater than 65 (dotted blue line) is deemed excellent and considered to be among the top 20% of all companies. In this case, Novo Nordisk (NVO) has a quality rating of 87.2 and if anything — the quality rating has been trending upward during the historical period displayed.
Quality: Top Shelf
How “high” is that Novo Nordisk (NVO) quality rating?
This is why I now feel like Pounce Piles are somewhat obsolete. Why? Because you can generate a list of the highest quality stocks at Manifest Investing with a few key strokes. (Go to StockSearch and input a minimum quality rating of 87)
As shown here, Novo Nordisk (NVO) ranks 26th, clearly “top shelf” … and keep in mind that we’re talking 26th out of approximately 2500 companies.
Novo Nordisk is a healthcare company and a world leader in diabetes care. The company has the broadest diabetes product portfolio in the industry, including advanced products within the area of insulin delivery systems. In addition, Novo Nordisk has a leading position within areas such as haemostasis management, growth hormone therapy and hormone replacement therapy. Novo Nordisk manufactures and markets pharmaceutical products and services that make a significant difference to patients, the medical profession and society.
Shopping … Studying … Patiently Waiting
On the subject of value or potential purchase:
“Not there yet?” “What do you mean by that?”
For this, we return to the company chronicle. But this time we shift our attention to the long-term return forecast (red line).
The current level of the long-term return forecast (projected annual return, or PAR) is actually at a fairly low point compared to the last 4-5 years. At a current PAR of 6-7%, this compares rather unfavorably to the median forecast (7.7%) for the 2500 companies that we track — and feel are representative of the general stock market. In other words, at 6.4%, we actually expect Novo Nordisk (NVO) to UNDERPERFORM the market going forward … and over the long term.
It’s not always this way. Note the peaks shown here. Many, many stocks were on sale during March 2009 and NVO was no exception. But a more compelling display of patient vigilance — and pouncing opportunities — comes as recently as September 2011 when the PAR spiked to unusually high levels (~15%).
As September 2011 approached, Europe was clearly entering (or already in) a period of significant challenge. A large correction in the wake of a recession — and geographic depressions — was already underway.
But were the institutions and analysts over reacting? Was there a chance that traders and investors were unfairly punishing the price of companies like Novo Nordisk (NVO)?
I think so. Fact: Only 29% of NVO 2011 sales were from Europe. 40% come from North America alone and there’s geographic distribution to Japan, Korea, China and “Other” (31%).
With a relative strength index rebounding from 30 (Potentially Oversold) and showing signs of a bullish divergence, the argument seemed fairly logical at the time.
So Far. So Good.
Novo Nordisk (NVO) has gained 52.4% (annualized) since 8/25/2011 while the Wilshire 5000 has delivered 21.1% over the same time frame for an alpha (relative return) of +31.3%.
Yes, Virginia, we can be patient and wait for the next world class opportunity.
That day will come again for Novo Nordisk someday … and we’ll be waiting.
In fact, that’s what we do — day in and day out, as a community of long-term investors — seeking and sharing these types of opportunities. So yes, now is not the time for this exceptional high-quality company but there will be another. Meanwhile, we take the energy we save by refusing to chase performance and seek other opportunities in our return forecast screens and watch for opportunities that would make Tigger smile.
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[…] first became aware of Novo Nordisk (NVO) back in 1996 when Charles Carlson mentioned it in one of his newsletters and explained his thesis […]