I have less than an hour before I have to leave for two more business meetings, but I promised several members that I would update Novo Nordisk (NVO) today.

PEGY Analysis Confirms Thesis Is Intact

Why is NVO down so much?

It appears that some analyst downgrades and Pfizer threatening to sue Novo for trying to buy Matsera have created a knee-jerk overreaction from investors who have been so badly beaten that any hint of bad news can send them running for the exits.

Novo was so overvalued after the GLP1 mania that it was at high risk of a significant bear market, and that’s what happened.

The Ozempic craze was so strong that EPS grew 58%, and Wall Street bid NVO up to a PE of almost 50 (14-year median 24, 20-year average 24).

So NVO was over 100% overvalued, compared to the 50% overvaluation of the S&P during the tech bubble peak.

The company’s growth has slowed due to competition in GLP1s, and it’s faced a management shakeup. Now, this $9 billion acquisition poses significant execution risk in healthcare M&A. And scary headlines like this.

What about this Metsera deal? Is it a good one?

OK, what about this new news from Pfizer, about fighting Novo for Metsera?

Morningstar makes a good point that NVO's attempt to poach this deal from Pfizer is unlikely to succeed. However, the FEAR that NVO might jack up its bid to try to win the Metsera board over, might be contributing to the recent weakness.

18 PE Is Morningstar’s Fair Value Estimate Vs 24 PE (14-Year Median & 20-Year Average)

Morningstar’s fair value estimate of $71 (51% upside to fair value by their estimate) assumes 10% growth (the historical rate).

Novo remains one of my highest conviction investment ideas.

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The 14-year growth of 11% is still expected to be surpassed over the next few years. However, for anyone worried about overpaying for Novo at the lowest PE is X years, know that it’s pricing in 7.6% growth, which is just 44% of the current consensus.

If you don’t believe NVO can grow at 7.6% in the future, then it’s overvalued.

If you think it can grow at 7.6%, then today’s yield implies 11% long-term returns (because today’s PE is fair value).

If you believe NVO is likely to grow faster than 7.6%, then there are value-mean-reversion profits to be harvested.

The margin of safety on NVO right now is very high.

Why?

Because the stock is priced for 7.6% growth, Morningstar thinks 10% long-term is likely.

Analysts expect NVO to grow at 17.5% from 2024 through 2029.

The slowest long-term growth rate for NVO over the last 20 years is 12.5%, and the median is 16%. So 17% to 18% long-term growth? Yeah, NVO can probably do that. But remember that in order for anyone buying the stock to be disappointed (to be wrong, for the thesis to break) would require growth slower than 7.6% which would translate into sub 11% returns.

If NVO grows ONLY at 6.6% then around 10% long-term returns are expected.

How much would NVO have to grow to avoid losing money over the next 5 years? -3.5%.

To lose money in NVO, the growth rate would have to turn negative, AND the market would have to price in permanent growth of 50% below its rolling-average and median 20-year growth rates.

31st Highest Quality Company on The GNG Masterlist

This AA-stable-rated dividend aristocrat is not going to suffer a dividend cut (the risk of that is 0.2% over the next year, 0.7% if we have a recession).

The only question NVO investors have to ask is “Do I trust the new CEO to generate 7.6+% long-term growth?

And if you don’t? Then you have to ask? “Do I think that NVO is going to grow so slowly that a PE 50% lower than its 14-year median and 20-year average is going to be the new fair value multiple?”

Because if a PE of 12 is NVO’s new fair value, then the total return becomes yield + growth, or 3.5% + whatever you think it can grow at.

And that creates such a low-risk opportunity that I am happy to set limits to buy NVO on weakness.

I’ve plugged in my actual $191K investment into NVO so you can see not only that the % return potential is exceptional, but also that the 2-year profit potential is life-changing for my family and business. $400K in potential profit over 2 years.