Feel better by investing well


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Kevin Kersten 02/03/2014

Drugs are a marvelous thing. They remove pain, allow us to live longer, and sometimes even give us a new lease on life. When people hurt, they go to the doctor and look for a perfect little pill to make everything better. Drugs can be expensive, but they also can be worth it provide relief from pain and chronic conditions. It is wonderful that today we have so many options available, while just a few hundred years ago, life was so much shorter.  The companies making these drugs now pour through massive amounts of data, and drug trials are never simple, but the results are worth it.

Novartis AG is a Swiss drug company which trades in America under the ticker NVS.  The company has a lineup of prescription drugs, generic drugs, eye care products, animal health products and even owns a third of Roche Holding AG, a rival drug company. Prescription drugs make up 57% of revenues, vision care represents 18%, while consumer, animal and other products make up the remainder.  Sales are spread all around the world with Europe (35%), US (33%), Africa and Asia (23%) and Canada/Latin America (9%) all being represented.

As a drugmaker, Novartis is sensitive to generic drugs coming into the market. Forty percent of the company's sales are protected by patents going into 2017, but Diovan and Gleevec are expected to lose patent protection and see competition later this year. US regulations are benefiting Novartis temporarily because Ranbaxy Laboratories is not going to be able to launch a copy of Diovan as soon as expected given the quality issues its been having with that particular drug. Novartis did post strong sales of Gilenya (51% gain) and Afinitor (32% gain). 

Chart courtesy of Stockcharts.com

The stock has risen steadily over the last year, going from $70 to about $80 a share. The stock has a market capitalization of $194 billion and pays a 2.69% dividend yield.  The stock has a P/E ratio of 5.7 and an S&P three STARS hold rating.

Novartis just reported earnings in late January, making $2.03 billion in the profits in the final quarter of the year. Novartis reported earnings of $1.20 per share beating analyst expectations of $1.19 for 4Q 2013.  Revenues for the quarter rose 1.7% over last year's Q4 to $15.1 billion. Revenues in 2013 of $57 billion are flat as a strong Swiss Franc worked against revenue growth in foreign currencies.  If you look at sales excluding the currency fluctuations, sales and product distribution grew about 4%. And growth is expected to continue near these rates.

Novartis is a large, stable diversified pharmaceutical company.  The stock is at trading at $79.27 so look at selling the 82.50 July covered call for $1.50.This trade is structured to allow the stock to rise about 4% to the $82.50 level before it will be called away. The assigned return is 6.0% and the annualized return rate is 13% if the position is assigned. For that to happen, the stock will have to rise 4% between now and July expiration. If the stock is below $82.50 at expiration, the option will pull in about a 1.9% return. You will also be able to pull in the dividends which should add another 2.6% yield to this trade.  This company looks stable enough that pulling in some extra revenue with a covered call is a real possibility. As always, check with your broker for the suitability of any trade to your portfolio and investing approach.

Even though you may feel good, taking the right drug can make you feel better. Having the right stock is good, but in flat and slowly trending markets selling a covered call can make investments produce a little more. Your investments get a little boost like you do from the medication. That can make your portfolio feel a little better. All investing has risks so weigh these with your broker and see if a covered call is the right prescription for your ailing portfolio.   

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Originally published on InvestorsObserver.com

This article appears in: Investing , Options

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