Should Novartis Be in Your Portfolio?

With shares of Novartis (NYSE:NVS) trading around $81, 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 healthcare 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 healthcare field, Novartis provides key products and services.

Speculation surrounding a merger between Novartis and Roche Holding Ltd. is unwarranted, said Novartis chair Joerg Reinhardt, according to a Reuters report Sunday. Reinhardt said that although its true the two companies will be working more closely, there are no plans for a merger. “Two pharma groups working in the same location have many topics in common,” Reinhardt said. Both Novartis and Roche are based in north-western Switzerland, in Basel. Reinhardt’s response echoes earlier statements from the chair this past year; in August, he was asked whether the two companies wanted to remain independent: Reinhardt replied with a resounding “absolutely.”

Reinhardt has been exchanging e-mails with Roche’s new chair Christoph Franz, who was nominated for the position at the end of March last year. The Novartis chair also added that he had recently met Franz’s predecessor, Franz Humer, a few weeks ago, according to Reuters. Novartis’ Chief Executive Severin Schwann has also previously denied speculation of a merger between Novartis and Roche. In October, Bloomberg and similar news outlets reported that the Chief Executive held a conference call with reporters in which he stated, “Nothing has changed with regards to Roche’s position towards Novartis. The families Hoffman and Oeri have repeatedly stated they’re committed to Roche’s independence.”

T = Technicals on the Stock Chart Are Strong

Novartis stock has been on a bullish run over the last several months. However, the stock is currently pulling back and may need time to stabilize. 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 signal 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

17.02%

16%

14%

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

Put IV Skew

Call IV Skew

April Options

Flat

Average

May Options

Flat

Average

As of today, there is an 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 small 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 rising 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), GlaxoSmithKline (NYSE:GSK), and sector?

Novartis

Pfizer

Merck

GlaxoSmithKline

Sector

Year-to-Date Return

1.09%

4.31%

12.31%

4.08%

6.44%

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

Conclusion

Novartis is a healthcare company that provides a number of healthcare products and services to consumers and companies worldwide. Speculation surrounding a merger between Novartis and Roche Holding Ltd. is unwarranted. The stock has been on a strong run, but is now pulling back. 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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