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When Bad Things Happen to Good Companies

Novo Nordisk

Novo Nordisk is one of my favorite companies. Its main line of business is the manufacture of drugs to treat diabetes. Diabetes is one of the fastest growing chronic ailments in the world, and virtually guarantees that there will be customers for its products for years to come.

From a numbers perspective, NVO is hard to beat:

:: Free Cash Flow Yield of 20.56%

:: Earnings Growth Rate of nearly 30% for the past year and nearly 25% on average for the past five years

:: Return on Invested Capital of > 52%

:: Return on Equity of > 54%

:: Debt to Equity of 1.23%

:: Beta of 0.59

:: A Dividend Coverage Ratio of 15.7

:: PEG Ratio of 0.93

What’s not to love?

Well, the FDA did not love their two newest drugs that were submitted for approval – in spite of the fact that the European Union, Japan, and Mexico have each approved them for use.

The announcement today of the FDA’s requiring additional information on the impact to cardiovascular systems sent the stock price down 13% as you can see in the graph above.

To me, this is a buying opportunity to add to shares of a company with a solid product line, very strong earnings, a pristine balance sheet, and a macroeconomic catalyst that should drive its price higher in coming years.

I didn’t buy any additional shares today – I wanted to wait for the news to be absorbed by the market – and given my view that the stock market has gotten ahead of itself I will likely wait for the overall market to pullback before adding shares.

However, I want you to see this graph of the stock over the past 20 years:
NVO 20 Years

This is a weekly chart and I’ve added a 200 week moving average so you can see what the movement is compared to its long-term historic trend.

Through good markets and bad, this is a company that does not give you many opportunities to buy it, so I don’t want to let this one pass my by.

The 40 week moving average price (also known as the 200 day moving average – 40 weeks X 5 days per week = 200 days) is around $157, 4.5% below the current $165 price.

My plan is to watch it and see if we can pick it up around $157, however, I don’t want to let it get above the 50-day moving average price of $171 without taking advantage of this opportunity.

Given the severity of the selloff, it will be a project to monitor the stock over coming days and jump in if it gets to either of the extremes $157 or $171). Otherwise, I’d like to wait until we get the coming correction and buy it then.

Bad things can happen to good companies. As investors, we need to know what constitutes a good company so we can take advantage of opportunities that are historically hard to come by.

My best assessment is that this is one of those opportunities and that the FDA is simply being over-cautious with this undervalued-high growth company.

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[enjoy this scene from one of my favorite movies, Empire Records]