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LRT Capital on Novo Nordisk (NVO): “We Believe this to be Highly Attractive”

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LRT Capital Management, an investment management firm, published its second-quarter 2021 investor letter – a copy of which can be downloaded here. A return of +29.68% was recorded by the LRT Economic Moat strategy for the Q2 of 2021, extending its 12-month returns to +42.18%. You can take a look at the fund’s top 5 holdings to have an idea about their top bets for 2021.

In the Q2 2021 investor letter of LRT Capital, the fund mentioned Novo Nordisk A/S (NYSE: NVO), and discussed its stance on the firm. Novo Nordisk A/S is a Bagsværd, Denmark-based pharmaceutical company, that currently has a $228.7 billion market capitalization. NVO delivered a 42.86% return since the beginning of the year, extending its 12-month returns to 53.08%. The stock closed at $100.65 per share on August 09, 2021.

Here is what LRT Capital has to say about Novo Nordisk A/S in its Q2 2021 investor letter:

"Novo Nordisk is the global leader in insulin, which is, sadly, a growing business as more and more people around the world suffer from diabetes. Millions of people need daily injections of insulin to stay alive50, a number that, unfortunately, is likely to continue to grow by millions more in the coming decade. It may seem at first glance that insulin should be a commoditized business, after all, it was discovered and synthesized over a hundred years ago, but nothing could be further from the truth. There are many types of insulin and Novo Nordisk has spent billions on R&D over the years to develop new products. On February 11th, the company reported favorable results from a phase-3 trial of Semaglutide, a drug that is currently used for Type 2 diabetes treatment. The study evaluated the use of Semaglutide for weight loss treatment in non-diabetic patients and found a significant impact on weight loss for patients receiving Semaglutide vs. the placebo control group. If Semaglutide is approved for weight loss treatment, we expect it will be meaningfully accretive to the company’s bottom line.

The company’s proprietary product line supports returns on invested capital of over 40%, and while sales growth is relatively slow (+6% annualized CAGR over the past decade), the company’s shares trade at a reasonable valuation of only 22x forward earnings. For a company with an extremely predictable business, high returns on capital, and an easily forecastable future, we believe this to be highly attractive.

Shares are +34.43% year-to-date and +40.92% over the past twelve months."

Top 12 Anesthesiology Residency Programs in 2018
Top 12 Anesthesiology Residency Programs in 2018

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Based on our calculations, Novo Nordisk A/S (NYSE: NVO) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. NVO was in 23 hedge fund portfolios at the end of the first quarter of 2021. Novo Nordisk A/S (NYSE: NVO) delivered a 30.74% return in the past 3 months.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage.

Disclosure: None. This article is originally published at Insider Monkey.