NONOF - Novo Nordisk: Catching The Falling Knife Now Could Really Hurt

2023-09-22 08:30:00 ET

Summary

• Novo Nordisk shares reached all-time highs in September but have since dropped nearly 10%. Buyers must question whether peak optimism has been priced in.
• With an "F" valuation grade, it isn't the time to be aggressive unless robust buying sentiments justify the market's conviction to push for higher levels.
• Novo Nordisk's growth could slow further through FY27, suggesting much of its medium-term upside could have been reflected.
• I caution investors to avoid falling prey to greed as NVO is significantly overvalued. With sellers gaining momentum after a dramatic surge, wait for a much steeper pullback first.

Leading diabetes and weight-loss drugs maker Novo Nordisk ( NVO ) saw its shares surge to all-time highs in September, as the global healthcare company released its first-half or H1 earnings report in early August. The company also executed a two-for-one share split in September, which could drive higher options liquidity and access for smaller retail investors in the market.

The dramatic rise in NVO has certainly not gone unnoticed after it first snagged the crown from LVMH ( OTCPK:LVMHF ) in early September as the "EU's most valuable company."

However, NVO has since topped out after it likely reached peak optimism. Notwithstanding the share split excitement, I gleaned that investors must brace for a more significant downward spiral as sellers have regained momentum. Given its remarkable surge in 2023, along with the stock of its main competitor, Eli Lilly ( LLY ), it should hardly surprise investors.

NVO posted a 10Y total return CAGR of 19.8%, significantly outperforming its healthcare peers ( XLV ). Its 5Y total return CAGR of 33.1% has benefited from a nearly 92% total return upside over the past year. As such, I can understand why investors who jumped on the board recently are likely feeling at the top of the world in early September, as the financial media and analysts raved about the medium- and long-term potential of the weight loss market through 2030.

Novo Nordisk Bulls would likely argue that a high valuation is justified, given the company's best-in-class "A" growth grade. Well, I don't disagree with that. However, it's essential to consider that NVO's valuation grade of "F" suggests investors should examine closely whether significant optimism could already have been priced in.

Management upgraded its revenue outlook for FY23 at its August earnings conference . Accordingly, Novo Nordisk is expected to deliver revenue growth of between "27% and 33% at constant exchange rates." Analysts' estimates of 26.6% YoY growth suggest that management's optimism could be overstated. Furthermore, growth is expected to slow further through FY27, with an expected 5Y CAGR of 15.9% from FY22-27.

I believe caution must be heeded at the current levels, given NVO's relative overvaluation. The market has likely priced in a dominant leadership of Lilly and Novo Nordisk in the weight-loss drugs market. However, we shouldn't discount the competitive and pricing risks that could result from improved supply dynamics moving forward.

In other words, I assessed that buying at the current levels while attempting to chase further upside due to "greed" isn't a reasonable investment thesis. While NVO's "A" momentum grade suggests buying sentiments have been robust, its September top in its price action indicates that selling pressure has intensified, behooving further caution.

As seen above, NVO topped out in September at the $100 level, dropping about 9% since then. However, before you consider buying the "dips," I gleaned that the potential downside on NVO's price action is more likely, suggesting dip buyers aren't expected to defend the current zone firmly.

While the next drop zone of $75 is seemingly far, it likely indicates the previous robust consolidation zone where I believe dip buyers accumulated. As such, I don't think they would be keen to return aggressively, as NVO's price action is under increasing selling pressure with no discernible critical support zone at the current levels.

Patience is urged and could prove to be wise. Given its overvaluation and unconstructive price action, trying to catch the falling knives now could hurt. Remain on the sidelines for now.

Rating: Initiate Hold.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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