Tuesday, March 20, 2012

NVO: Love turned sour

Novo Nordisk A/S (NVO) is a pharmaceutical company specializing in diabetes and treatments for haemophilia, growth hormone deficiency and really difficult menopause symptoms.

More simply, this Danish global company, headquartered in the Copenhagen suburb of Bagsv√¶rd,   specializes in blood.

Novo Nordisk had the most bullish chart of 15 stocks added today to the Zacks top-buy list.

Its price has grown with only shallow interruptions from $94.58 on Oct. 7, 2011 up to $144.82 on Feb. 28, an all-time high.

Following its breakout into blue-sky territory, the stock immediately pulled back into the shadows with a five-day correction down to $137.00. It has since come back to within a dollar and quarter of the peak.

On the chart, NVO is a breakout waiting to pop. A persistent break above $144.82 would signal the uptrend is still in place.

Certainly the financials are in place. A return on equity of 46%. (Not a typo, 46%!) Long-term debt amount to 2% of equity. (Not a typo, 2%!)

From those two facts alone, I've fallen in love with NVO.

But there is a shortage of competing suitors. Institutional ownership is a mere 7% of outstanding shares. Yet, the price is high: It takes $5.76 in stock to control a dollar in shares.

More broadly, my problem with pharmaceuticals is that they are more prone to regulatory decisions than most other sectors. All it takes as an administrative rejection of a drug to send a pharma company down into the cellar.

NVO is big, and diversified. But still, there is regulatory risk.

With average volume of 353,000 shares, the stock is not among the super-liquid. The options selection is limited, with low open interest and wide bid/ask spreads.

That lack of liquidity and options goodness is like a bucket of cold water in the face. Sadly, after seeing what options are in the NVO cupboard, my short-lived love affair with Novo Nordisk has turned sour.

The company will next publish earnings sometime in May. It goes ex-dividend March 22 on an annual payout yielding 1.74%.

Decision for my account: I'm passing reluctantly on NVO. I like the chart a lot, but the lack of a good options inventory is a deal-killer. Another strategy would be to buy the stock to capture the dividend, but the three-figure stock price doesn't allow much granularity, and frankly there are safer ways to harvest dividends under 2%.

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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