Streetwise

Lauren Rudd

Sunday, September 4, 2011

Armageddon Is Not Underway

Stock prices were unusually volatile during the month of August. The Dow Jones industrial average was down as much as 7.4 percent on August 10, but recovered to where the Dow is now in positive territory for the year. To that end, on Monday, August 29, the Dow chalked up a gain of 254 points, its fourth largest gain this year. However, there were also four consecutive days of swings of greater than 400 points, a record for the index.

Yet, on returning from my recent honeymoon/vacation, I found that the Dow, which was at 11,403 when I left on August 17, had risen to 11,613 on August 31. The S&P 500 index was up similarly from 1,192 to 1,218. Admittedly those are not large gains. Nonetheless, given the extensive overflow of emails and voice mails from a panicked investing public that greeted me on my return, you would think that Armageddon was underway. It is not.

Keep in mind that the recent volatility, although substantial, when viewed minutely merely promotes antacid sales. When viewed dispassionately over time it becomes clear that what you are seeing is simply a series of knee-jerk reactions, sponsored in part by computerized flash trading.

Although such activity can be fertile ground for professional speculators, it can just as easily become quicksand for newly minted traders foolish enough to believe they are facing a mother lode of opportunities.

Meanwhile, this is Labor Day weekend, which means the start of football season. In football, the offense usually huddles before each play by forming a circle around the quarterback, their bodies leaning forward, their heads bent inward and their butts pointing towards the rest of us.

On Wall Street, as Alan Abelson of Barron’s once wrote, a huddle consists of an analyst calling out stock plays to an assembled group of wealthy clients, their bodies leaning forward, their heads bent toward him and their butts pointed at the rest of us. But wait, the opposition has a defensive play designed to increase to a more equitable level the taxes paid on the Street’s stratospheric levels of income.

Running interference for the Street’s offense are those in Congress for whom the idea of the wealthy contributing a dime more to support a system that has enabled their wealth is an anathema to everyone’s well-being. It seems that the avarice on Wall Street is as limitless as the pain and suffering it has wrought upon Main Street.

However, to atone for its sins, the Street limits many of its investment ideas to a specific client base, meaning those that generate the largest fees and commissions. In doing so, they prevent those less generously endowed, financially speaking, from the duress of information overload. One cannot help but admire such altruistic ideals.

Nonetheless, you are not excluded from the world of potential investment profits, albeit on a smaller scale. Consider for example Novo-Nordisk (NVO), a Danish healthcare company with an 88-year history of innovation and achievement that has developed an extensive array of medical products and is a leader in its field.

When I last talked about Novo-Nordisk a year ago, my earnings estimate for 2010 was $3.96 per share with a 12-month price target for the shares of $98, for an estimated capital gain at the time of just over 12 percent. At the time there was also an indicated dividend yield of 1.55 percent. So how did the company perform? Earnings for the year came in at $4.54 and the shares recently closed at $106.66, producing a total gain of just over 20 percent.

If you decide to research the company, keep in mind that much of the financial data is released in Danish Kroner, so the exchange rate with the dollar is going to have an effect. The current exchange rate has the Danish Kroner worth about $0.1936.

The intrinsic value of the shares, using a discounted earnings model with a growth rate of 15.46 percent and a discount rate of 15 percent is $128. The more conservative free cash flow the firm approach yields an intrinsic value of $166 per share.