2 Compounders I'm Looking At + Derivatives Executions
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The aim of all activities is to achieve the desired outcome with the minimum investment of time or other resources. To that end, I aim to be shamelessly pragmatic. Do not expect long form “original” content from me. My edge is that I am only willing to invest in high quality businesses / special situations and that I’m willing to wait while that happens.
#1 - Novo Nordisk (Ticker: NVO)
Anyone who briefly reads any health related news and has dug deeper into the pharma companies that own diabetes solutions understand that Novo Nordisk is a pretty big dog.
Diabetes as a trend is rising - this bodes well for most pharma companies providing some form of diabetic solutions in the form of diet inhibitors or insulin providers.
Per Morningstar: “As a pioneer in diabetes care, Novo has been in the business for over 85 years and claims 34% of the $50 billion-plus diabetes treatment market and roughly half of the more than $15 billion insulin market. Diabetes' prevalence is expected to soar in coming decades as a result of an increasingly overweight and aging population, and we expect Novo to maintain its wide moat as it continues to dominate in diabetes and obesity therapy innovation.”
The growth of drugs like Ozempic, Wegovy, and other GLP-1 therapies, the immense amount of money, time, and government approvals required to bring new drugs to market will ensure companies like Novo Nordisk earn high returns on capital over time with patents extending to 2032. GLP-1 therapies which were 70% of 2023 sales and rising. Per Q32024 presentations, NVO 0.00%↑ now has 33.9% diabetes market share. Obesity care grew 44%. The co also returned approx $18.1 billion to shareholders through buybacks and dividends.
What does forward returns look like for Novo Nordisk investors at current prices? Back of the napkin math seems to be:
Shareholder yield - 2.6%
Earnings growth over time has been 16% cagr - let’s assume 6%
Change in valuation multiple: 5 year average pe ratios was 34.68x. Current earnings of 29.18x correcting back to the 5 year average adds 18% to the long term possible return.
Assuming lacklustre growth, continued share buybacks, slight revaluation contributions of 9%, we can expect about 19.6% returns from buying NVO 0.00%↑ at this level.
Derivatives Approach - 30 delta put options on NVO for $84 strike Feb07th expiry looks juicy with $1.66 per share premiums. A $50,000 allocation allows for 595 shares or about 6x put options for $166 per option to close at $996 or a 1.9% yield on $50k of capital. Not too bad for 12 days. Alternatively, you can buy shares outright and sell covered calls for mostly the same amount, but you would lose the “surprise” downside protection and buffer provided from selling puts in the first place but you might miss out on too much of a good surprise earnings from NVO. All things considered, I prefer puts to pad the downside vs partake in the upside with huge risk.
#2 - Fortinet (Ticker: FTNT)
FTNT 0.00%↑ provides various network security / secops / data security solutions. As can be imagined, prospecting for such businesses is a lengthy process, customers that grow almost always spend more, security is constantly added on, and almost never changes.
The dynamics of being such an important anchor point in your client’s business is evident in $FTNT’s revenue growth (10Y - 24.7% cagr, 5Y - 27% cagr), earnings per share growth (39%), and free cash flow generation per share (31.4%).
If you want to read up more about it - go through reddit discussions and buy a couple of network engineer professionals lunch. Once you understand the industry dynamics (from procurement to installation to maintenance and up), the strength of its business will be evident.
Caveat - I’m no IT professional, I can be wrong. But I have liked what I’m hearing and I think competitively, Fortinet does measure up well versus other industry participants.
What does forward returns look like for FTNT? Back of the napkin math seems to be:
Shareholder yield - 3.2%
Earnings growth over time has been 39% cagr - let’s assume 7% over the long run.
Change in valuation multiple: 5 year average pe ratios was 59.82x. Current PE of 48.82x correcting back adds 22% to the long term possible return. Even without change in valuation multiples, a 10.2% return from long term earnings growth and shareholder yield isn’t too bad with a call option on PE multiples returning to “average”.
Derivatives Approach - Fortinet earnings is also releasing soon on 6th Feb after market close. 7th Feb 30 delta $91 strike expiry put options provide $2.65 per share of premiums for 2.9% returns. In the event earnings is good and shares go up, puts expire worthless and you get to re-roll. If earnings is “bad” and shares drop - you are buying from a lower price and your average would be $88.35, about . Heads you win, tails you win less.