Get Ready for the Fall

"The bigger they are, the harder they fall." It's the worst nightmare of every investor in today's market -- buying a rocket stock just before it takes a nosedive.

Every day, WSJ.com publishes a list of stocks whose shares have just hit new 52-week highs. Every day, investors read the list and tremble -- some with greed, others with terror. Within our Motley Fool CAPS investing community, these top stocks generally enjoy favorable ratings, since everyone loves a winner… but not always:

Companies are selected from the "New Highs & Lows" lists published on WSJ.com on Thursday and Friday last week. 52-week low and recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

"Everybody loves a winner"
After the tumble markets endured over the last few weeks, you might be surprised to discover that any stocks are still doing well. But yes, a few of them are. Burrito-slinger Chipotle, Internet star JDS-Uniphase, and the company that proved airlines really can earn a profit -- Southwest -- are all trading at their highest levels in a year.

Polling all Fools, it seems few investors believe any of these companies are in danger of imminent collapse. To the contrary, CAPS members suspect Cummins could go even higher … but not quite as high as Novo Nordisk. That's why this week, we'll be examining….

The bull case for Novo Nordisk
While it lacks the name recognition of Pfizer (NYSE:PFE) or Eli Lilly (NYSE:LLY), this Danish powerhouse simply dominates in one sector of the medical market -- mtinvest calls this one the "World leader in insulin."

Why is that important? CAPS All-Star georcole explains:

With food companies putting more sugar in a lot of our foods, diabetes is going to become a bigger problem than it is today. No matter what the economy does, people will still need to get their insulin and such, and Novo Nordisk is in a great position to capitalize on this unfortunate situation. They have grown at a pretty good clip and are sure to continue into the foreseeable future.

Indeed, fellow All-Star Turbolover wrote in March to inform us of "a movement to LOWER the blood sugar levels considered to be diabetic. This would cast a wider net and a substantially higher percentage of the population would then require treatment."

While none of this is good news for diabetics, it does give investors a chance to profit from the companies that treat this disease. Novo Nordisk derives 73% of its revenue from diabetes care -- and reaps simply huge profits off the business.

A diet rich in profits
The firm generated $2.5 billion in free cash flow from this business in 2009, a 25% free cash flow margin on its revenue. In short, for every $100 in drugs Novo sells, it pockets $25 cash in profit. Analysts expect Novo to keep on growing its profit at better than 16% per year over the next five years, which makes the company's enterprise value-to-free cash flow ratio of 19.2 look, if not exactly cheap, then at least not unconscionably expensive.

In fact, when you tack on the firm's modest 1.9% dividend yield, I'd go so far as to say that the stock looks fairly priced today.

Foolish takeaway
The way I look at it, after gaining 37% over the past year, Novo Nordisk stock is no longer a screaming bargain. But it's not so expensive that it might be headed for a drop. Long story short, I see no reason why this stock must fall.

Disagree? Feel free. If you think Novo Nordisk will crash from its sugar high, here's your chance to tell us why.

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