Streetwise for Sunday Sept. 6, 2009

Streetwise

Lauren Rudd

Sunday, September 6, 2009

Its Football Season Once Again

This is Labor Day weekend and of course that means football season is upon us again. In football, the team on offense huddles before each play. Traditionally the huddle consists of the players forming a circle around the quarterback, their bodies leaning forward, their heads bent toward him and their butts pointing towards the rest of us.

As Alan Abelson of Barron’s so adroitly pointed out recently, within Goldman Sachs a huddle consists of an analyst calling out stock plays to an assembled group of big-buck clients, their bodies leaning forward, their heads bent toward him and their butts pointed at the rest of us.

This variation of the sacred pigskin procedure, disclosed recently by the Wall Street Journal, seems to have provoked angry outbursts similar to the recent chorus of disapproval erupting over Goldman’s predilection for high frequency trading (trading ahead of major orders).

Goldman takes the position that by limiting tips to an exclusive group of clients (those that generate the largest commissions); it is being fair and right-minded by preventing those less generously endowed, financially speaking, from suffering information overload. One cannot help but admire a firm with such altruistic ideals of that magnitude.

Yet, this desire for hot tips is nothing new. Whenever I mention that I write about investing, the response is predictable. “Wonderful, do you have any hot tips?” Ignoring 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, the response is no. Hot tips are better left to horse racing.

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. 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 in bank CDs. Tactfully, I do not point out the effects of inflation, while silently giving thanks for the FDIC.

Finally, there are those well intentioned individuals who have invested hard earned dollars solely on the basis of a marketing pitch and a free lunch, where the hype was high, as were the commissions and fees, but not the resulting investment performance.

What do all these people have in common? They have passed up readily discernable and potentially rewarding blue chip investment opportunities that are available through a deep discount brokerage house with a commission per trade of less than the price of lunch at McDonald’s.

Want an example? Consider Novo-Nordisk (NVO), a Danish healthcare company with an 86-year history of innovation and achievement. The company has developed an extensive array of medical products and is a leader in its field.

When I last talked about the company a year ago, its shares were trading at $54 and my 2008 earnings estimate was for $3.35 with a $63 target price for the stock. Earnings came in at $3.05 per share and the shares recently closed at $60.19.

For the second quarter of 2009, Novo reported that its second-quarter profit rose 21 percent to 2.99 billion Danish kroner ($580 million), from 2.47 billion Danish kroner in the year-earlier period. Sales increased 17 percent to 13.00 billion Danish kroner for the period. The company cited sales growth in North America as a main factor for the increase. Furthermore, the company expects sales growth of 10 percent for the current year, measured in dollars.

The intrinsic value of the shares, using a discounted earnings model with a growth rate of 18 percent and a discount rate of 15 percent is $127. The more conservative free cash flow the firm approach yields an intrinsic value of $101 per share.