Technical Opinion

Novartis International AG is a large pharmaceutical company with various fields of R&D and products, it is a company which much like many pharmaceutical companies is hard to assess in terms of investment value, because some of the breakthroughs in this industry cannot be predicted using financial and balance sheet models. The stock has a Beta of 0.59, which makes it quite correlated to the rest of the market, and the stock is technically strong as seen through the weekly chart because it has been rallying in a nearly straight line, matching an ideal slope of around 45 degrees.


The trend of this stock is still up, but in recent weeks however some indicators have been suggesting that a downward correction may be in place, this could bring the linear rally phase to an end and the stock may continue to trade sideways to higher, but in a more erratic way which will likely confuse investors and traders.


For all investment purposes, the moving averages of the 50 and 200 period, on both daily and weekly charts, as well as the ADX index, can provide a basic but reliable early warning system in case the stock starts going down for good. Equally so, it can warn investors of good news, in case the stock trades more erratically, but still in a positive way where the underlying direction will remain up.


The above weekly chart shows how this stock has been moving steadily higher over the recent years, but the ADX index is one of those indicators hinting lack of trend conviction for the coming weeks, as it has turned lower once again.

The above weekly chart shows how this stock has been moving steadily higher over the recent years, but the ADX index is one of those indicators hinting lack of trend conviction for the coming weeks, as it has turned lower once again.

Fundamental Opinion

Novartis stock appears to have a valuation of between $70 to $90 when looking into the next few years, and being a pharmaceutical company the stock in this case has the benefit of the unknown, which means there might be good news for the company down the line, some new market, some new product which analysts may be completely unaware about at the moment. This is a stock where the fundamental levels may be exceeded, and this can create risk for investors, but out of the blue something good can happen and fundamental valuations can improve dramatically so they catch up with higher prices very fast.


Therefore Novartis is seen as a neutral to positive stock for long term investment purposes, one where the risks are justified. The stock is currently trading slightly above realistic fundamental valuations levels of $90, and a bottom value of $70. Therefore investors are encouraged to perform company and industry specific analysis on this stock to assess as to whether something big could be in the making. If that is the case the stock could slowly become overpriced, so as to rise to $150 or higher, while the economic and balance sheet analysis lags behind, until it too slowly starts to rise and the valuation rises from $70-$90 to higher levels, in proportion to stock price increases.


The recent stock price history holds promise that this stock is an asymmetrical bet, where the reward is bigger than the risk. The fundamental valuations during 2012, for this stock, which was trading at $50 at that time, could not have possibly predicted today’s $100 stock price, because the pharmaceutical industry being too scientific for economic analysts is hard to predict, so what we have been seeing here is that fundamental valuation is lagging stock price, and they are both moving higher.


The stock is considered a safe, asymmetrical bet for long term investors, as long as they pay attention to the growth of this company and the slope of the stock price trend on the charts, as long as the rally is moderate the stock could continue to go higher because there might be an underlying higher target set since 2012. One which the pharmaceutical marketplace itself determines, and there is no way to know how high this stock can go in 2 or 3 years down the line.


If the stock does go down to or near $70 in the current year, then it will become a fresh buying opportunity for all investors, as it is highly unlikely to stay this low for long, and some kind of new up-trend will follow. The stock is already suitable enough for a buying-the-dips strategy, even from today. The worst that can happen is a loss of momentum and a drop through the 50 week moving average down to the 200 week moving average, which at this time seems to match the bottom valuation of $70, but the bottom fundamental valuation level of $70 is absolutely solid and remains so even if the stock price moving average itself drops in value, in such a case the fundamental valuation overrides all moving averages and should be given more importance.


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