Streetwise

Lauren Rudd

Sunday, September 2, 2012

Wall Street and Football Have Much in Common

The trading activity on Wall Street when viewed minutely merely promotes antacid sales. When viewed dispassionately over time from a more macro vantage point, it becomes apparent that much of the activity is merely a series of knee-jerk reactions, sponsored in part by computerized flash trading and often exacerbated by low volume.

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 the mother lode of wealth.

However, this is Labor Day weekend, which means the start of football season and the opportunity to once again point out the similarities between the grid iron and Wall Street. 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 so ably 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 down and their butts pointed at the rest of us. But wait; there is a proverbial flag down on the play. The defense is demanding a change in the rules, including an increase in the taxes paid on stratospheric levels of income.

Undeterred, the offense has called to the line of scrimmage guards and tackles who believe that even the suggestion of higher taxes to support a system that has enabled their wealth represents an anathema to their well-being. It appears that the avarice on Wall Street is as limitless as the pain and suffering it has wrought upon Main Street.

Yet, justice prevails. To atone for its sins the Street tries to limit its investment ideas to a specific client base, meaning those that generate the largest fees and commissions. Does the selective release of analyst research on Facebook, prior to its IPO, ring a bell? The justification of course is that in doing so they prevent those less generously endowed, financially speaking, from undergoing 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 89-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 the Company a year ago, my earnings estimate for 2011 was $5.55 with a 12-month target price on the shares of $115 that would result in a capital gain of just over 15 percent. The price back then was $106.66 plus an indicated dividend yield of 1.30 percent.

So how well did the Company perform? Earnings for the year came in at $5.60 and the shares recently closed at $156.23, producing a capital gain of just over 46.5 percent.

And the Company marches on. Looking at the results for the first half of 2012, sales increased 17 percent while gross margin improved by 1.3 percent to 81.7 percent. Operating profit increased 31 percent while net earnings increased 22 percent to $1.746 billion. Earnings per share rose 26 percent to $3.14 per share.

Management’s guidance going forward is for sales growth of between 9 and 12 percent and a 15 percent growth in operating profit. When you go to do your own research on Novo-Nordisk, keep in mind that much of the financial data is released in Danish Kroner, so the exchange rate has an effect. The current exchange rate has the Danish Kroner worth about $0.1671.

The intrinsic value of the shares, using a discounted earnings model with a growth rate of 18.41 percent and a discount rate of 15 percent is $182. The more conservative free cash flow the firm approach yields an intrinsic value of $204 per share.