A Great Way to Play Defense

08/28/2007 12:00 am EST

Focus:

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Mark Skousen, editor of Trader Alert, offers up a stock that he thinks has plenty of upside potential with little downside risk.

The market has been bouncing like a ping-pong ball lately.

On the one hand, bullish investors point to low interest rates, low inflation, rising economic growth, and earnings that are mostly beating expectations.

The bears, on the other hand, point to high-energy prices, the housing slump, and a growing credit crunch.

This is a tug-of-war that is playing out in the market each trading session. And that makes now an excellent time to add a defensive stock to our hedge portfolio, one that offers plenty of upside potential with very little downside risk.

A perfect candidate is Novartis AG (NYSE: NVS).

Every year in the United States, influenza is responsible for the deaths of more than 36,000 people and the hospitalization of 200,000 more.

The Centers for Disease Control and Prevention (CDC) in Atlanta has predicted that the 2007-2008 flu season will be a particularly virulent one.

Switzerland's Novartis is the second-largest supplier of influenza vaccines to the United States. The company is increasing the production of influenza vaccines by 30% and will deliver 40 million doses for the 2007-2008 flu season.

But Novartis's influenza vaccine is just one of the many reasons to be excited about the company. As the sixth-largest supplier of prescription drugs in the United States, it also owns more than 11% of the huge hypertension-drug market, helped by its industry-leading drug Diovan.

Novartis excels in other areas, as well—with its cancer-fighting Gleevec, Femara, and Zometa drug lines, as well as Visudyne, which fights age-related macular degeneration of the eye.

All this translates into good news for Novartis and its shareholders. Recent quarterly sales rose 13% to $9.8 billion. Net income climbed 19% to $1.64 billion.

And the company's prospects are better still: its new-drug pipeline is loaded with 138 projects in development. Over 100 of those are in advanced stages of development, including treatments for bipolar disorder, diabetes, osteoporosis, atherosclerosis, cancer, pain, viral infections, and a number of other conditions.

Not only is this a recession-proof business, Novartis also serves as a great hedge against the declining dollar. After all, the stock is denominated in Swiss francs.

So buy Novartis at market today. (It closed Monday above $53—Editor.) And place a protective stop at $46. If you prefer to play this one more aggressively, try the January 2008 $60 calls (NVS-AL).

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