Stock pick of the week: Eli Lilly's evil twin
But what's actually evil?
Thoughts on the market - a bitter pill
The big market news for me this week came from Eli Lilly (LLY).
It showed strong results for its weight-loss drug you can take as a pill instead of an injection.
Of course pill-popping is way better than needle-stabbing.
So Lilly’s stock surged.
And Novo Nordisk (NVO), a holding of mine and key Lilly competitor, fell even further.
Novo is the OG of these new, high-priced weight-loss drugs. Living a fairy tale life until last summer.
But we’re seeing regulation and competition rewrite the story.
Novo is now the ugly duckling of pharma. The black sheep. Or Lilly’s evil twin.
Lilly’s PE is up to 70x while Novo’s is down to 18x.
In the famous Danish fairy tale, those other ducklings were wrong to be such haters.
It looks wrong to hate so much on Novo too.
Thoughts on investing - my go-to screener
Because…newsflash: Novo may have its own pill up its sleeve.
So maybe this whole pill issue will just dissolve away.
But way more important: pill or no pill, Novo is still pretty gangster.
Here’s one example. ROCE.
I’ve always been into ROCE. But over the past few months, I’ve gotten really into it. High historical ROCE, to be more exact.
There’s a lot to love about companies that post strong ROCE year after year.
It’s how you get that compounding effect.
It’s also a common sign of other good things at the company. Like strong cash flow, low debt and good management.
So ROCE has become my go-to initial screen. I set the bar at 20%. Three-year, five-year and ten-year ROCE of at least 20%.
This is a high hurdle to weed out pretenders from contenders.
But for Novo, it’s no hurdle at all. In all three categories, its ROCE is over 70%.
No other way to say it: those returns are fat.
Thoughts on this week’s stock pick - see no evil?
For Novo, it’s not all pretty.
As an investor, I don’t love everything about the pharma industry.
And while I admire Novo’s work with diabetes, I have mixed feelings about this new obesity market. It’s a good thing for sales. But for society? I wonder.
But to me, Novo's history, financials and outlook don’t look that ugly.
Nor does Novo’s trailing PE of 18 or forward PE under 15.
This week I bought more shares as soon as I could after the Lilly news and long Easter weekend. (DKK 395.)
And if Novo stays around this level, I’ll think I’ll buy more.
What I’m not thinking about buying is Eli Lilly.
Its PE of 70x - now that looks evil.
Thanks for reading. Talk to you next week.
Joel Sherwood invests each week and writes about what he buys, learns and earns. He’s a former journalist for Dow Jones and The Wall Street Journal, and a current bank employee. He lives in Stockholm, Sweden and started the Sherwood Investment Letter in January 2025. Purchases are not recommendations.