Novo in a nutshell

Novo Nordisk (Novo) is a global healthcare company headquartered in Denmark that focuses on developing and commercialising innovative medicines, primarily for the treatment of chronic diseases like diabetes, obesity and rare diseases.

The company's core strength lies in its portfolio of insulin and GLP-1 based treatments. Novo Nordisk is the global leader in diabetes care, holding 33.9% global market share in 2023. The company also leads the global obesity market.

Novo Nordisk operates in two main business segments: Diabetes and Obesity care, and Rare disease. The company has a global reach, with sales in over 80 countries and manufacturing facilities in several locations.

Market capitalisation

In finance parlance, we refer to this as market cap. Market cap is the value of the company’s equity. In other words, it is the amount you would have to pay today if you could buy the whole company at the current stock price.

From the graph you can see that in June 2024, Novo had a market cap of $654 billion. But now in November 2024, it is only worth $450 billion. That is a 31% drop in value.

As the second largest holding in our Extraordinary Companies portfolio, this is hurting our performance. Let me rephrase that - if were concerned about the performance, we would be feeling pain. But we are not concerned.

Our goal is to own the best companies in the world. Sometimes, they will outperform and other times they will underperform. Other people’s offers to purchase our shares (i.e. stock prices) do not affect our opinion on ownership or our feelings toward Novo.

As private investors, we have a privileged position where we can ignore short-term price movements. Many professional investors in the investment management business would be losing their minds about a huge portfolio position losing value. Because when their fund value drops, clients withdraw money. A smaller fund means less fees and less bonuses. In that situation, you can see how the focus can subtly move from the best investment decision to the best business decision.

We can remain focused on the best investment decision.

Financial performance

What are the numbers telling us?

1. Novo has brilliant returns on capital employed (ROCE), including the latest period. It averages almost 69% and we consider 15% respectable.

2. Profit margins are consistently high. If you look at the quarterly numbers (not shown here), you will see that margins have been consistent.

3. Revenue growth is fantastic at 16.5%.

4. Stock-based compensation is reasonable.

5. Debt repayments are well covered.

What is going on with the stock price?

ROCE gives us the first clue. Fiscal year 2023 was a very good year. Returns were high and growth was spectacular. This year (2024) is still excellent, but things have slowed down a bit.

Earlier in the year, the market valued Novo based on expectations that were set on 2023 data. The stock price went up. But with more recent data, the market has re-evaluated its expectations and the stock price has drifted downward.

What should we do?

Nothing.

Imagine you owned the whole of Novo when it was worth $650 billion - making you the richest person in the world. Would you sell it now that it is worth $450 billion - still making you the richest person in the world?

Probably not. After all, why give up your golden goose?

Although you don’t own the whole company, the decision-making process is the same for stocks. The company is still a golden goose, so keep it.

Conclusion

Don't let stock price movements drive your investment decisions. Rather be guided by the company's financial performance.

Here are valid reasons to sell:

1. You need the cash for something else in life.

2. You found a better company (good luck finding better than Novo).

3. The company’s fundamentals or prospects are deteriorating.

4. You are changing your asset allocation (e.g. less stocks, more bonds).

Some people might also cite risk tolerance as a reason to sell. They might suggest investing in cheaper, lower risk companies. Beware. What do you prefer - a highly valued brilliant company or a bargain basement low performer?

Here’s what Uncle Warren says on the matter.

For me, companies like Novo are best thought of as “forever companies”. Plan to own them forever or at least for a very long time. Of course you can change your mind, but make sure it is for a good reason.

I would like to hear what you’re up to.

DM me on social media or email me.