Stocks

Q&A: Novo Nordisk (NVO)

expectingalpha Stocks

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.

We’ll take this opportunity for a little demonstration. Demonstration is a way of life for us at Manifest Investing. Some of you are reading this via our FREE blog at http://expectingalpha.com

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We think you’ll discover that there’s more to this iceberg. Explore. Enjoy.

… 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?

Pretty high.

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.

Company Description

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%).

Technically Speaking

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.

If you’re a MANIFEST subscriber, thank you. We’re grateful for your patronage and the selfless sharing that’s been a hallmark of our community for decades. Please share http://expectingalpha.com with friends and family. Urge them to create a trial account at Manifest Investing. The potential difference that we can make in the futures of our loved ones is substantial.

Value Line Low Total Return Screen (1/11/2013)

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I first became aware of Novo Nordisk (NVO) back in 1996 when Charles Carlson mentioned it in one of his newsletters and explained his thesis at an investment conference. His thesis is still intact. The company designs and delivers medical treatments (including innovations in insulin delivery) for diabetes and a variety of other conditions (including coagulation and hormone replacement therapy.) Over the past sixteen years, Novo Nordisk has an annualized total return of 21.3% during a period when the S&P 500 delivered 4.3% — for a relative return of +17.0%! It’s nice to see Value Line give the 3-5 year forecast price a boost in this week’s update. Novo Nordisk might be something of a gold standard for a pounce pile. Buying opportunities have been limited (current conditions aren’t quite there yet) but they’re worth waiting for. We’ll be waiting, watching and willing to accumulate when that time comes.

Materially Stronger: Mylan Labs (MYL), Novo Nordisk (NVO)

Materially Weaker: DuPont (DD), AstraZeneca (AZN), Kelly Services (KELYA), Pan American Silver (PAAS)

Release The Dividend Hounds

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Charles Carlson is a long-time favorite in our community (The Individual Investor Revolution, Little Book of Big Dividends)

For the dividend doggers out there, release the dividend hounds!

http://bigsafedividends.com/

On this site, you’ll find up-to-date BSD (Big, Safe Dividend) scores, Quadrix® ratings, dividend and yield information, dividend-payment schedules, and other relevant dividend data on every dividend-paying stock in the Standard & Poor’s 1500 Index. The site provides literally a one-stop shop for all things dividends and is a powerful tool for researching dividend-paying stocks. And by the way, all the information is provided free of charge.

Hallowed Hedge

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Goldman Sachs is regarded by many as a potentially effective source of ideas. We count Abby Jo Cohen among our favorites.

Goldman is out with their 40 most undervalued stocks going into 2013. You can check out the dashboard here along with the Business Insider review of the 40 favorites here:

GOLDMAN: These Are The 40 Most Undervalued Stocks In The Market

As displayed on the dashboard, we’ve invested $25,000 into each of the (40) for a total of $1,000,000.

Where’d we get the $1,000,000? Since we’re not in the practice of minting our own $1,000,000,000,000 coins around here, let alone $1,000,000 — we created our own $1,000,000 by finding a willing hypothetical broker who would let us “short” 25 stocks ($40,000 each) to generate the necessary funds.

The dashboard for these (25) despised stocks is available here

Where’d we come up with this list? Business Insider compiled a list of the 25 stocks with the highest short interest as a percentage of float. In short, these are a group of stocks with the most institutional (rhino) smart money betting AGAINST them.

See: The 25 Stocks That Everyone Is Shorting Like Crazy

In a perfect world, our shorted stock reserves will go down in value (it’s what we owe and ultimately must repay) while the (40) loved stocks will advance. But we’d settle for the value of the Goldman faves outpacing the Most-Hated for the purposes of this hedging demonstration.

We’ll check back in a few months to see if the hedge is en fuego.

Jan-2013 Screen: Creme of the Crop

expectingalpha Stocks

Creme of the Crop

This month features the top percentile of all stocks covered at MANIFEST on the basis of return forecast and quality rating.

Overall Market Expectations

The median projected annual return (MIPAR) for all 2400+ stocks followed by MANIFEST (Solomon database) is 8.4% (12/31/2012). The multi-decade range for this indicator is 0-20% and an average reading since 1999 is 8.5%.

January Effect: Study Hall

We generated this month’s list of stocks by simply search for all companies with a MANIFEST Rank > 99 while limiting the field to financial strength ratings greater than 70 and EPS Stability of at least 60.

Screening Results (12/31/2012). Top-ranked high-quality stocks with solid return forecasts. All qualifiers also have an EPS stability of at least 60 and a financial strength rating of 70 (B++) or better.

The results are shown here in the accompanying table. With MIPAR at 8.4%, we compare it versus the long-term average forecast which happens to be 8.5%. So we’re literally looking at fairly average return conditions. And in times like this, it probably makes sense to tighten down the hatches — seeking higher-quality candidates with a little more financial strength. In the event of the next recession, we want to be well represented by industry leaders with superior profitability and relatively little debt. Likewise, in order to avoid cyclical whipsaws (and since earnings are the source of dividends) … we’d urge higher EPS stability ratings while bolstering our core holdings.

This month’s screening result delivers a smorgasbord of companies that fit this bill. In fact, virtually all of the companies that we’ve added daily to the Core Diem portfolio since October are here in this month’s results.

AeroVironment (AVAV) engages in the design, development and production of unmanned aircraft systems and energy technologies for various industries and government agencies. Whatever you think of drones, they’re here to stay. As I watched my 70-something grinning father-in-law open a remote operated helicopter on Christmas morning … these things have a lot of staying power.

Coach (COH) has been a repeat Solomon Select feature (Jun-2006 & Oct-2008). Wall-to-wall standing room only at the outlet mall this holiday season. Across the way, a much larger Michael Kors (KORS) store was COMPLETELY EMPTY. Not sure how much of a competitive threat KORS can be. Bag this one.

Masimo (MASI). November 2011 Solomon Select. Non-invasive. We still like this one a lot. And when you can’t invade, send in the drones.

Walking Main Street: 2013 Challenge

expectingalpha Investing, Stocks

And that walk is anything but random.

It’s the kind of walk you take after rolling out of bed, rejuvenated while practicing prudent and effective sleep-at-night investing. This morning Eddy Elfenbein rolled out for the sixth consecutive New Year’s Day after watching his 20 Buy List stocks outperform the S&P 500 over the trailing year. Six years in a row. How many funds have outperformed the S&P 500 every single year over that time frame?

Nada.

There’s a single fund that is 5-for-5 (didn’t exist six years ago). The fund (PSLDX) is a hybrid that appears to invest in stock futures and a blend of bonds. So it’s not even a direct comparison.

Eddy’s 2013 Buy List, as always — is a low turnover (no changes permitted during the calendar year) — collection of 20 stocks. They’re predominantly core stocks with a few special situations. Our tracking dashboard for Eddy’s 2013 Buy List is available here:

Crossing Wall Street: 2013 Buy List

Main Street

We sleep pretty well too. And we’ll have some fun with the (20) best-positioned stocks from your 40 most widely-held stocks as shown in the accompanying listing.

It’s not a zero sum contest. We actually hope that Eddy will roll out successfully for a seventh straight year and that our favorites will join him.

For kicks, we’ll also add a group of honorable mention entries to our Christmas Countdown collection bringing the total to (20) and compare all of these participants side-by-side as 2013 progresses.

Coca-Cola (KO)

expectingalpha Stocks

The 12th stock in our Christmas Countdown is Coca-Cola (KO).

It doesn’t pay to argue with Santa Claus. It’s apparent that when he’s done rocking the world and stocking homes with presents from Alaska to Zealand (New) that he settles in for the polar bear drink of choice, Coca-Cola: The Real Thing.

This high-quality company doesn’t often drift (or bubble) to the highest return forecasts but the quality rating is steady and top shelf. In this case, the Value Line low total return forecast is 10% — still a couple of percentage points above the median stock. In the accompanying visual analysis, we see a company growing at 5-6%. (The years before 2011 have been suppressed and removed from the trend because the data array wouldn’t include the combination of Coca-Cola Enterprises.)

Coca-Cola delivers steady profitability and is diversified into water, sports drinks, fruit juices — beyond the legacy soft drink beverage.

It’s the kind of company that won’t set a portfolio on fire but can be a bolstering buffer if things get dicey in any given year.

And with that — let’s hope for the best for our (12) countdown stocks in 2013 because we know that many of you hold them in your portfolios.

On Dasher, Dancer, Comet, Cupid …

Happy New Year and Good Luck Everybody!

The complete Countdown with links to the individual features can be found here:

Christmas Countdown 2013

MANIFEST 40 (December 2012)

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The Stocks You Follow: December 2012 Update

We’ve always believed that the collective decisions made by our community of long-term investors is worth huddling over … a place where ideas are born.  Your MANIFEST 40 is a tracking portfolio of the forty most widely-followed stocks by the community of long-term investors at Manifest Investing.

Apple (AAPL) continues in the pole position in our quarterly update.

One of the biggest surges comes from Bio-Reference Labs (BRLI) as the company moves from #7 to #3 in the new rankings. Microsoft (MSFT) slipped from #4 to #6?

Coach (COH) also has been quite popular of late — since the price pulled back — and has moved from #18 to #10.

Performance Results

It is here that our community shines. The average annualized RELATIVE return for the current tracking portfolio is +4.5%. (The absolute return for the tracking portfolio since inception is 6.3%.) The accuracy rating (% of outperforming picks) of the current selections is 62.2%. (!) Including all selections since inception (7.25 years), the annualized relative return of the MANIFEST 40 is +3.3%.

The figures in parentheses are the position of the company during the September 2012 listing of the MANIFEST 40. For example, Fastenal (FAST) moved from #15 to #12 over the last three months.

MI 40 20121231R

Chargers

What companies are making the strongest gains among this consensus collection? This may be indicative of strong fundamentals (combined with attractive prices and returns) and probably warrants further study.

The companies making the largest advances (by percent of dashboards) since 9/30/2012 are: Res-Med (RMD), Coach (COH) and Bio-Reference Labs (BRLI).

The newcomers this quarter are Intuitive Surgical (ISRG), Paychex (PAYX) and QUALCOMM (QCOM).

Strongest Performers

The top performers in the MANIFEST 40 since inception are shown here:

The tracking portfolio (dashboard) for the MANIFEST 40 can be found here.

Value Line Low Total Return Screen (1/4/2013)

expectingalpha Stocks

Why do we pay attention to the Value Line weekly updates? Because a number of highly successful long-term investors cite Value Line as one of their favorite trusted resources.

“I don’t know of any other system that’s as good… The snapshot it presents is an enormously efficient way for us to garner information about various businesses… I have yet to see a better way, including fooling around on the internet, that gives me the information as quickly.” — Warren Buffett, Berkshire Hathaway, 1998 Annual Meeting speaking about The Value Line Investment Survey.

“[Value Line is]…the next best thing to having your own private securities analyst.”
—Peter Lynch, One Up On Wall Street

In our case, we’ve found the low total return forecasts for all companies to be among the most compelling opinions/forecasts while we either (1) search for opportunities or (2) practice effective stewardship when it comes to staying vigilant about our current holdings.

And in this case — this week — we find an outsized number of opportunities as the average Value Line low total return forecast (11.5% as shown in the accompanying figure) for the companies in Issue 7.

Materially Stronger: SanDisk (SNDK)

Materially Weaker: Western Digital (WDC), Questcor Pharma (QCOR), Skullcandy (SKUL), Benchmark Electronics (BHE), Pitney Bowes (PBI), International Rectifier (IRF), Advanced Micro Devices (AMD), Intersil (ISIL), PMC-Sierra (PMCS)

With the median low total return forecast (for all 1700 stocks) at 8.7%, we’ve found that shopping in the range where the return forecasts are 5-10 percentage points better than the market average. In this case, we’d be drawn to Intel (INTC), Logitech (LOGI) and Cree Research (CREE) as they’re closer to the “heart” of the “sweet spot.”

This graphic provides a quick check (second and third opinions) versus the Value Line forecast for the featured companies. The second and third opinions are from Standard & Poor’s (S&P) and Morningstar. A comparison is made versus the fair value (FV) opinion expressed by both of these research services. In the case of Staples (SPLS), the elevated low total return forecast aligns pretty well with the Value Line opinion — but the Morningstar analysis doesn’t even think Staples is undervalued at these levels with a Fair Value Ratio (FVR) greater than 0%. (For Fair Value Ratios, negative figures suggest stocks that are potentially undervalued or “on sale.”)

Our experience is that the S&P opinions are more reliable when it comes to non-core stocks and/or special situations. The Morningstar analysis seems to correlate more closely with our methods when it comes to core stocks.

In the case of Staples (SPLS), we’d lean towards the S&P judgment and agree with Hugh McManus. Hugh presented Staples as his featured stock for the December 2012 Round Table — fully noting and disclosing that challenges lie ahead. We’ll take a closer look at Staples (SPLS) with a full analysis as well as Intel (INTC) as it appears relatively well-positioned here.

Note the different opinions from S&P and Morningstar on Apple (AAPL). As noted, for special situations — we’d place more credence on S&P in these situations, and see Apple (AAPL) as less undervalued than most people think it is.

Happy New Year, to stock hunters everywhere!  May the new year find good hunting and exceptional returns.

Cherokee (CHKE)

expectingalpha Stocks

The 11th stock in our Christmas Countdown is Cherokee (CHKE).

As the Motley Fool suggested a while back, you have to “look beyond the earnings” (translation: weak track record in recent years) when performing analysis on Cherokee. The company has clearly struggled while at the same time making considerable progress in recent quarters. The new acquisitions and relationships seem to be taking hold and if the company can regain some of its luster of a few years ago, significant price appreciation (along with above-average dividends) are possible here.

We know about turnarounds and our expectations are conditioned accordingly. That said, every one in a while it’s OK to reach for a Christmas miracle.

With a sales growth forecast of 6% (that could easily ramp to 6-12%), a net margin of 29.3% and a projected P/E ratio of 15x, the long-term return forecast is 19-20% (per annum).