Should Novartis Be in Your Portfolio?

With shares of Novartis (NYSE:NVS) trading around $82, is NVS an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework.

T = Trends for a Stock’s Movement

Novartis engages in the research, development, manufacture, and marketing of a range of health care products worldwide. Its portfolio features medicines, eye care, cost-saving generic pharmaceuticals, preventive vaccines and diagnostic tools, over-the-counter drugs, and animal health products. The company operates in five business segments: Pharmaceuticals, Alcon, Sandoz, Vaccines and Diagnostics, and Consumer Health. Its core products and services are prescription medicines; surgical, ophthalmic pharmaceutical, and vision care products; generic pharmaceuticals,  human vaccines, and blood-testing diagnostics; as well as over-the-counter medicines and animal health. In a growing health care field, Novartis provides key products and services.

Novartis agreed to buy CoStim Pharmaceuticals Inc., expanding its reach in immunotherapeutics, a new field of cancer drugs that may reach $35 billion in annual sales. Novartis will acquire Cambridge, Massachusetts-based CoStim, a closely held biotechnology company for an undisclosed sum, the Basel, Switzerland-based company said in a statement on Monday.

T = Technicals on the Stock Chart Are Strong

Novartis stock has been on a bullish run over the last several months. The stock is now trading near all-time high prices and looks poised to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Novartis is trading above its rising key averages, which signals neutral to bullish price action in the near-term.

NVS

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Novartis options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Novartis options

18.41%

60%

58%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

March Options

Flat

Average

April Options

Flat

Average

As of Monday, there is average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Novartis’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Novartis look like and more importantly, how did the markets like these numbers?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

1.43%

-8.16%

5.8%

5.43%

Revenue Growth (Y-O-Y)

1.92%

3.7%

-0.36%

2.11%

Earnings Reaction

-0.36%

3.26%

-0.8%

-1.02%

Novartis has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Novartis’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has Novartis stock done relative to its peers – Pfizer (NYSE:PFE), Merck (NYSE:MRK), and GlaxoSmithKline (NYSE:GSK) — and sector?

Novartis

Pfizer

Merck

GlaxoSmithKline

Sector

Year-to-Date Return

3.18%

4.28%

10.77%

4.68%

6.72%

Novartis has been a poor relative performer, year-to-date.

Conclusion

Novartis is a health care company that provides a number of health care products and services to consumers and companies worldwide. The company agreed to buy CoStim Pharmaceuticals Inc. The stock has been on a strong run, and is now trading near all-time high prices. Over the last four quarters, earnings and revenues have been increasing, which has left investors pleased. Relative to its peers and sector, Novartis has been a poor year-to-date performer. Look for Novartis to OUTPERFORM.

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