Novartis Is Worth At Least $80-$85 A Share

In our portfolio as of late, we have refrained from selling option premium for a few reasons. Firstly after the French election over the weekend, the volatility index CBOE Volatility Index (INDEXCBOE:VIX) really contracted and actually collapsed by 27% on the the 24th of April. Furthermore because of the likelihood of the the S&P500 (NYSE:SPX) breaking out of consolidation period it has witnessed since early March, the risk here is to the upside in my opinion

Implied volatility in our Novartis AG (ADR)(NYSE:NVS) position just was not enough to risk losing our shares through a potential covered call trade. In any event I still see this company as undervalued and I believe the biotech sector continues to demonstrate that it will follow if not lead equities higher.

Novartis to me is at least worth $80 a share and today’s earnings could catapult the shares towards that number so we will hold until the stock at least reaches our target price. I believe the best course of action at present in the equity space is to hold stock as the S&P500 feels that it wants to charge higher. In fact, its latest rally could be the start of a brand new intermediate cycle I feel, especially if we get some follow through in this rally. If one is adamant on selling option premium, I would skew trades to the upside as the last thing you want is to have multiple short calls in the money.

We will know whether we have a brand new intermediate cycle or a daily cycle on our hands pretty soon in the spiders. If this is another daily cycle, price should follow over quickly from here as the momentum indicators and short term sentiment are both overbought. However if we have started a brand new intermediate cycle on our hands, price will ignore short term overbought conditions and will rally to new highs.

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Irrespective of how Novartis’s first quarter earnings turn out, I feel this company has plenty of competitive advantages to ensure it will continue to grind higher. Its pipeline, existing patents and sheer economies of scale all point to future share price gains for Novartis. Furthermore the company has almost 5 times more equity on its balance sheet compared to its debt and is currently paying out a strong dividend yield of 3.64%. One of the most important metrics to watch in companies operating in this sector is free cash low. Why ? Well enormous sums of capital is always needed to develop any firm’s next range of drugs.

Pfizer (NYSE:PFE) springs to mind as a huge cash flow generator in this space and so is Novartis. Last year Novartis generated $8.59 billion in free cash flow on net incomes of $6.7 billion. Remember the stock reached $105 a share back in the Summer of 2015 ( which was a sector-wide top) but the fundamentals remain intact. Meaningful diversification in areas such as heart failure and oncology will drive the company forward where Novartis will be able to charge top dollar prices for its innovative drugs. I have said repeatedly that I like biotech’s fundamentals and Novartis is one of the strongest operating in this sector at present.



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