Streetwise for Sunday Sept 7, 2008

Streetwise

Lauren Rudd

Sunday, September 7, 2008

Regardless, I Have To Keep Trying

After 20 years of writing newspaper columns, I keep hoping that maybe I am making a dent in the approach people take to investing. Yet, many of you continue to find yourselves engulfed in the travails of searching for some undiscovered technique that will offer untold financial rewards.

For example, whenever I mention that I write about investing on Wall Street, the responses are often predictable. Some say, “Wonderful, do you have any hot tips?” I ignore the overt tone of sarcasm coming from those who abandoned Wall Street for real estate because you never lose money investing in brick and mortar. Given that hot tips are better left to horse racing, I simply respond with a single word...no.

Others look at me askance, their faces blanching as they put forth a diatribe on how nobody makes money on Wall Street and how whenever they have taken somebody’s investment advice they lost money. Furthermore, am I aware of what has happened on Wall Street recently? My withering look is usually ignored as they proceed to offer up their version of Investing 101.

No sir, they say, with more than a little emphasis on the no, their money is staying right where it is, in their bank’s certificate of deposit or savings account. There is nothing like the safety of a bank. Tactfully, I do not point out that after taxes and inflation they are likely receiving a negative return. I also silently give thanks for the FDIC.

Finally, there are the well intentioned who have invested hard earned dollars solely on the basis of some glossy marketing brochure or annual report. The hype was high, as were the commissions and fees, but not the investment’s performance.

Many of you research an automobile down to the tire size, or know the number ice cubes per hour a new refrigerator puts out. Yet, when it comes to investing you pass up readily discernable and potentially rewarding blue chip investment opportunities that are available through a deep discount brokerage house where the commission per trade is less than the price of lunch at McDonald’s.

Need an idea? Consider Novo-Nordisk (NVO), a Danish healthcare company with an 85-year history of innovation and achievement. The company has developed an extensive array of diabetes products, in addition to being a leader in hemostasis management, growth hormone therapy and hormone therapy for women.

When I last talked about the company a year ago, its shares were trading at about $54, split adjusted, and my target price was $65. The shares reached that level on August 5. However, they have since fallen back to around $55 per share, which makes the story even more enticing.

Novo's performance is better than it appears on the surface because the company reports in Danish kroner and was therefore adversely impacted by the dollar’s weakness over the past year. As a result, Novo's 21 percent sales growth in North America was just 7 percent when converted into Danish kroner.

Worldwide, in local currencies, revenue increased 13 percent for 2007, with operating income up 25 percent. However, as the dollar continues to strengthen, it works to the advantage of firms like Novo that are based abroad and report in their local currency.

For the first half of 2008, Novo reported a 7 percent sales increase of its diabetes-care drugs and supplies and operating income is up 11 percent. Net profit for the year is expected to increase by 32 percent to 8,522 million Danish kroner.

The intrinsic value of the shares, using a discounted earnings model with a discount rate of 15 percent is $88. The more conservative free cash flow the firm approach yields an intrinsic value of $113 per share.