Pat McKeough responds to many personal questions on specific stocks and other investment topics from the members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions.

This past week, one Inner Circle member asked about one of the dividend stocks in his portfolio. Pat replies with a look at whether this leader in diabetes products can sustain its growth with new products and expanded international markets.

Q: Hi Pat: Novo Nordisk has a strong history of raising its dividend. I own it now, but would like your advice on how the future looks.

A: Novo Nordisk A/S (ADR symbol NVO on New York; www.novonordisk.com), is a major Denmark-based producer of diabetes-care products, including insulin. It also makes products for hormone replacement therapy and treating coagulation disorders.

The company controls 50% of the global insulin market. It gets 40% of its sales from North America, followed by the European Union, 29%; Japan and Korea, 9%; China, 8%; and other regions, 14%.

Novo’s shares have moved up since late last year on higher profits and sales.

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Dividend stocks: Earnings expected to rise with newest diabetes product

The company’s earnings should continue to increase this year. That’s partly because of higher sales at the Diabetes Care division thanks to the success of its newest product, Victoza, a once-daily treatment for Type 2 diabetes.

Victoza’s sales more than doubled last year, to just over $1 billion, making it responsible for 55% of Novo’s overall sales growth. The company launched Victoza in China in the fourth quarter of 2011.

Novo also has a number of products that are nearly ready to go on sale: it submitted its new, longer lasting insulins, Degludec and Degludec-Plus, for U.S. and European regulatory review last year. More recently, it filed for marketing approval for these products in Canada, Japan and Switzerland.

Novo’s shares now trade at 25.2 times this year’s forecast earnings of $5.65 a share.

In the most recent Inner Circle Q&A, Pat looks at whether Novo’s high price-to-earnings is justified by the company’s growth prospects and whether its shares can keep on rising. He concludes with his clear buy-hold-sell advice on the stock.

Inner Circle members see Pat’s analysis and recommendations on the stocks that other members have asked about in each week’s Inner Circle Q&A. You can view it immediately when you become a member of this unique investment group. You will get Pat McKeough’s answers to your personal investment questions, full access to our members-only Inner Circle website, and many other membership privileges. Click here to get started right away.

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COMMENTS PLEASE

Do you believe that pharmaceutical and drug stocks will thrive as the population ages? Do you invest in these stocks? How do you choose the companies you invest in? Does your personal experience with pharmaceutical products help you decide? Let us know what you think in the comments section below. Click here.

Q: Pat, a lot of people are excited about the fact that Facebook is going to start selling its stock to the public. Do you think people should buy it?

Pat McKeough: Well I’d say that’s a good question. Facebook has a huge following and many people have high expectations for it. It’s entirely possible that it will shoot up on the first day it sells out, but as a company to invest in, at the price they’re selling it for, I think I’m going to take a pass, and that’s what I advise other people to do.

I can tell you that our system, we tend to downgrade or stay out of, companies that are in what we call the broker/media limelight. When the brokers and media are talking about something favourably, it tends to raise investor expectations. And this one has extremely high investor expectations. It may not be able to live up to those expectations, and when that happens, there can be very stunning downturns.

Another risk factor is that it is a new issue after all, and a new issue comes on the market with a great deal of broker and media attention. And that fades, it evaporates, or at least reduces to a great extent after the new issue sells out. So suddenly if you quit seeing the name of your stock in the paper anymore, or as much, you may be tempted to dump it.

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Looking a little further on, it’s a great concept, obviously it’s done wonders, but I’m not so sure it’s going to be staying as long as many people think. Many people I talk to are kind of sick of Facebook. You know, they’re somewhat older than the typical Facebook customer.

Another problem with Facebook I would say is that the guy that created it is a genius, but he’s not an experienced business genius. And the way the thing is set up, he has carte-blanche to do what he wants. And he is probably, the nature of the thing being what it is, going to make some mistakes. So my feeling is, no, I wouldn’t buy it, I wouldn’t recommend it. It’s certainly not the worst thing out there, but it’s not something I’m going to recommend.

COMMENTS PLEASE

Do you like Facebook, or are you tired of hearing about it? Based on your own experience of it, do you think it is growing in popularity and influence among people you know, or are they losing interest? Let us know what you think in the comments section below. Click here.

Over the course of the average month or year, we look at a great many stocks for our newsletters, our Inner Circle and our portfolio management clients.

Of all the stocks we look at, we add only a tiny minority to those stocks we might think about recommending. There are several very good reasons why we are so particular with our stock choices.

Stock picks: Only a small minority recommended as buys

First, stocks that are attractive enough for us to want to recommend them as buys are always a small minority. After all, it’s relatively easy to set up a company and sell stock in it to the public. All it takes is some capital, legal fees, input by stock-promotion consultants and cooperation from a handful of brokers.

Promoters can launch a new company while it’s still living off that initial capital. (They can then add to the capital by selling stock in the company to the public.) Meanwhile, they can maintain investor interest with a string of press releases and other public-relations efforts.

Don't take chances with your retirement nest egg. Protect your portfolio and make it grow with expert advice from Pat McKeough, cited by The Wall Street Journal as "one of only four investment newsletter advisors who have managed to serve their readers well over the long haul." Click here to learn how you can profit from Pat McKeough's The Successful Investor newsletter.

Start-ups and new issues are always highly risky. But even long-established companies can fail to thrive for years, while maintaining a seemingly healthy glow. As their business gradually loses momentum, they expose you to an ever-growing risk of loss.

In contrast, it’s much harder to set up and manage a business, and make it thrive over long periods. That’s why only a small minority of stocks are ever really suitable for serious, long-term investment.

Stock picks: In the end, we discount everything except investment quality

In the initial phase of our research, we eliminate high-risk stocks and those with limited prospects for profit. This still leaves us with many stocks to choose from, however. We have to watch out for well-established stocks that look attractive on the surface, but lack the investment quality profit potential that we seek.

Even if a stock looks like it might thrive, we may still refrain from recommending it for a number of reasons. Our research may lead us to conclude that it presents too much risk of heavy loss if it fails to thrive. Or we may feel that stocks we already recommend offer better alternatives.

Or we may simply prefer to hold off on a promising stock because we feel it has limited near-term potential. This can happen because it has been overhyped in the broker/public relations limelight, for instance. Stocks that fall into this limelight can attract exaggerated expectations—which means any downturns can be swift and brutal.

In many cases, we watch the progress of these stocks-we-like-a-little. We may recommend buying them months or even years later, but only after seeing favourable developments and signs of progress.

This painstaking approach is a lot of work, but it pays off. It has led us to recommend many stocks that subsequently surged in price. For that matter, our recommendations include a remarkable number of stocks taken over at high prices that gave our readers huge profits. In addition, this approach cuts risk. It has also kept us out of a lot of duds, not to mention total losers.

In the latest issue of Stock Pickers Digest, you get our report on the rise of Alimentation Couche-Tard, our #1 Stock Pick of the Year, plus advice on 20 more stocks with exceptional profit potential. As a new subscriber, you save $50.00—plus you get FREE the report, “My #1 Aggressive Stock Pick for 2012”, which also contains my Conservative Stock Pick of the Year and U.S. Stock Pick of the Year. Click here to get started now.

Some aggressive investors like to get into fast-growing stocks at what they describe as “the ground floor.” They think the best way to profit in stocks is to buy them when they are just barely starting out on a growth phase that can last for years if not decades. Ideally, they want to buy the future top performers when they are still near or close to the penny stock range and have yet to be discovered by the broad mass of investors.

These investors rarely find what they’re looking for. That’s because there’s a large random element in investing, especially at the ground floor. Many promising junior stocks fail to thrive as businesses for one or more of any number of reasons. To borrow from the opening lines of Tolstoy’s Anna Karenina, successful stocks tend to have a lot in common, whereas unsuccessful stocks tend to suffer from their own unique sets of risks and faults.

Sometimes stocks with intriguing business concepts just never get anywhere. They generate a number of encouraging news releases, but these releases turn out to be a series of exaggerations and broken promises.

Don't take chances with your retirement nest egg. Protect your portfolio and make it grow with expert advice from Pat McKeough, cited by The Wall Street Journal as "one of only four investment newsletter advisors who have managed to serve their readers well over the long haul." Click here to learn how you can profit from Pat McKeough's The Successful Investor newsletter.

Stock investing advice: When one important investor sells, trouble often follows

Promising stocks may start out with a brilliant idea or a plan to get involved in a high-profile or fast-growing business area. They may enjoy an initial burst of sales or even earnings. But many just can’t keep up the momentum. They never reach the critical mass they need to achieve consistent profitability.

This is more common in junior techs, because they compete with well-established, well-financed senior techs. The seniors have an enormous advantage in well-trained staff, sales networks, media contacts and all sorts of other business assets that can take years, if not decades, to develop.

You compound your risk if you invest in a promising junior that is a “thin” or illiquid trader. When a stock is a thin trader, it doesn’t take much buying or selling to influence its price. So if just one important investor decides to sell, it can cause an abrupt stock-price slump. This can spark a cascade of selling and a collapse in the stock’s price. The resulting stock downturn can scare off other potential investors. This can make it impossible for the formerly promising junior to raise additional funds when it needs them.

Investors in start-up companies also face one overriding, continual risk: it’s easier to launch a promising company than to create a successful business. That’s why only a minority of junior companies ever go on to significant success.

In the new issue of Stock Pickers Digest, you hear the latest on the rise of our Aggressive Stock Pick of the Year, plus advice on 20 more stocks with exceptional profit potential. As a new subscriber, you save $50.00—plus you get FREE the report, “My #1 Stock Pick for 2012”, which also contains my Conservative Stock Pick of the Year and U.S. Stock Pick of the Year. Click here to get started now.

Below is the transcription of Pat’s comments.

Hidden Value and Takeover Stocks

Q: Pat, three of the stocks you’ve recommended have been taken over in the past few months—Mosaid Technologies, Gennum and RuggedCom. What’s the secret of recommending stocks like this?

Pat McKeough: The one thing we really look closely for in our organization is hidden value. I define hidden value as a potential gain that’s not really offset by a potential loss. It could be real estate that’s carried on the books at old prices that are way below current prices; it could be a large research budget that could turn out to be a great source of new products; it could be an organization that’s been working on developing a certain way of operating for a while and now is finally getting it right.

That’s the kind of thing that smart takeover operators look for. And we do the same. Other investors will sometimes follow a momentum approach; that’s when they try to buy things that are really on a roll, that are reporting great earnings increases all the time. And that’s fine, too.

But the thing with hidden value stocks is that you won’t get hurt much if the value stays hidden for another few years. But they can suddenly come into public attention and start reporting higher earnings and provide you with a big gain.

And sometimes takeover artists come along and pick them up before that happens. Either way, it can be a low-risk way to do quite well with your investments.

A Note from Pat McKeough on his Wealth Management Services

Imagine having me build you a portfolio that’s tailored to your specific investment goals, temperament and financial situation. That’s just one of the many ways you benefit when you become a client of our portfolio management services. Backed by my in-house team of investment experts, I’ll work to protect your money during times of market turbulence — and maximize your profits when the market rises. Click here to learn more about how you can profit from our Successful Investor portfolio management services.

Not everybody is happy with the agreement on Greece’s national debt that was reached after much hard bargaining. But it didn’t exactly bring world stock markets crashing into the abyss, either—although many predicted just such a disaster. That gives it a resemblance to the Y2K crisis of a dozen years ago.

Y2K, in case you missed it, was media shorthand for the crisis that was supposed to hit at midnight on December 31, 1999. That’s when the world’s computers were supposed to freeze up; they were programmed to designate years by their last two digits, and they wouldn’t know how to handle the year “00”. Many investors thought this would usher in an immediate stock market plunge. Nothing of the kind happened. Before 1999 ended, owners of all of the world’s most important computers had found ways around the problem in time to avoid it.

The Greek debt crisis did not have the same precise countdown as that event, but the principle for investors is the same.

Generally, this is how these widely discussed and presumably momentous crises turn out: they leave people wondering why all those dire predictions fizzled out.

Gloomy forecasts can also be brought on by a short, sharp crisis. Witness what happened last summer when the 405 Freeway in Los Angeles shut down for two days of scheduled maintenance. The media predicted traffic chaos (they called it “Carmageddon”, after a popular video game). But commuters took alternate routes and no major problems occurred.

At The Successful Investor, our approach to investing is conservative. It puts a premium on safety. Yet it has given investors spectacular gains on many stocks that have soared—including stocks we recommended that have been taken over. The most recent of these was Gennum, which soared more than 100% in day on news of its takeover bid. As a new subscriber, you can save $50.00 on an introductory subscription to The Successful Investor, and receive a FREE copy of Pat McKeough’s report on the “My #1 Stock Pick for 2012” when you order. Click here to take advantage of this special offer now.

Investing advice: Forecasters can also miss with optimistic predictions

You will also see upside-down versions of this principal. One rather drastic example occurred in January 1973, when the U.S. and North Vietnam concluded a peace agreement. At the time, the Dow Jones Industrial Average had recently gone above 1,000, a level that it had reached but failed to exceed twice before, in 1966 and 1968. It was widely assumed back then that the economic strain and uncertainty of the Vietnam War was holding the stock market back, and that the Dow would shoot up to 1,200 or higher when the war ended. Here too, nothing of the kind happened. Instead, the index dropped to 570 by the summer of 1974.

These are all instances of a broader investing principle: when investors generally accept a widely talked about, specific market prediction, they take measures ahead of time to avoid the risk or profit from the opportunity. By the time the predicted conclusion is expected to appear, the events that made it seem a sure thing have already spent their impact. This turns the prediction into a dud at best. Often, the opposite of the predicted event occurs.

To put it in even more basic terms, the things that really hurt investors are those they never saw coming. To succeed as an investor, you need to plan your investments with this simple fact in mind. The best way to do that is to follow our three-part investing advice.

1. Invest mainly in well-established companies; they have the experience to survive and prosper despite setbacks.
2. Spread your money out across the five main economic sectors; in any setback, some sectors do much better than others.
3. Downplay or avoid stocks in the broker/media limelight; that’s where failed predictions can do the most damage to your finances.

Many in Greece are upset with the debt settlement; so are those holding Greece’s sharply discounted bonds. And there will be more anxious headlines over the problems of Europe’s debtor nations. Yet it seems highly unlikely that any future scenarios in the debt crisis will catch investors unaware, especially those who have planned their investments with our three-part strategy in mind.

You will get specific advice and recommendations on how to follow our three-part investing strategy every month in The Successful Investor—and every week in The Successful Investor hotline, which included in the price of your subscription. As a new subscriber, you can save $50.00 on your introductory subscription. Click here to take advantage of this special subscription offer.

Below is the transcription of Pat’s comments.

Qualms About a Stock: SNC-Lavalin

Q: Pat, you often tell readers they should sell a stock immediately if they ever develop qualms about the insiders of a company. How does this apply to the recent reports from SNC-Lavalin?

Pat McKeough: That’s a good question. The idea of getting out of a stock when you develop any qualms about the insiders really applies to qualms about the central insiders, the people who are running the company and the thrust of the company.

Every company’s got bad actors in it. SNC is a multi-billion dollar company. There’s something going on there that shouldn’t have been, but I don’t think it really goes to the core of the company. I think it’s the kind of thing that happens in a big company when people aren’t as disciplined as they should be and there are political events going on. I think right now that SNC has had some problems and it’s going to cost some money. I’ve reduced it to hold. I do think this could turn out to be an attractive buying opportunity. But the problem is we just don’t know. So I’m going to leave it at hold. But it wouldn’t surprise me at all that if you bought now, you’d be very happy in 2 to 5 years.

But that’s a little bit different—just to clarify—if you discovered that in a small company. Just thinking off the top of my head, we advised selling a certain Chinese stock a couple of years ago just because we didn’t like the way that the information was being presented.

And it turned out that there were a lot of ugly things going on at that company that really resulted in a lot of people losing money. We’d have sold it on the basis that we had qualms; we didn’t have any kind of direct evidence of any wrongdoing. SNC is not in that league; SNC is in another league of multinational companies with huge revenues and connections all over the world. So the short answer is, no, I don’t think it’s time to sell SNC due to any doubts about the company.

A Note from Pat McKeough on his Wealth Management Services

Imagine having me build you a portfolio that’s tailored to your specific investment goals, temperament and financial situation. That’s just one of the many ways you benefit when you become a client of our portfolio management services. Backed by my in-house team of investment experts, I’ll work to protect your money during times of market turbulence — and maximize your profits when the market rises. Click here to learn more about how you can profit from our Successful Investor portfolio management services.

Below is the transcription of Pat’s comments.

When Good Stocks Go Down

Q: Pat, here’s an interesting question from a reader. You’ve got a good stock that’s been going up for years and then it starts going down. When do you get rid of it? What percentage loss do you let go of it at?

Pat McKeough: That’s one of those things—people assume good stocks go up like a bunch of people in an elevator. What really happens is that most stocks go sideways for unpredictable periods, and then shoot up. If you try to be in the stock only when it’s shooting up, you’ll wind up buying at peaks quite often, because the shooting-up portions of the stock’s life are unpredictable. Unfortunately, sometimes stocks go down for a bit, and you think, now I’m buying on a dip. Great! And then they go down some more. You might say to yourself, I’ll stick with it until it drops 5%, or I’ll stick with it until it drops 10%.

Unfortunately, there’s a random element, a stock can drop 5% or it can drop 10% and that says nothing about what happens next. And I can tell you the fact that you own a stock that’s dropped 5 or 10% also says nothing about what it’s going to do next. So you shouldn’t let that influence your decision on whether you hold or sell.

What you should do is look more closely at a stock that goes down. Say to yourself: Is there something I’m missing here, is there something that’s deteriorating about this stock, something that’s undermining its value? And if there is, of course you should sell.

But it may well be one of those random elements that comes along that you just have to accept. The point of investing in a portfolio instead of just one or two stocks is that while some of your stocks are randomly going down, others will be going up. What you really need to look at is what are your long-term total returns and not fret over one particular high-quality stock that happens to be going counter to the market and losing ground.

A Note from Pat McKeough on his Wealth Management Services

Imagine having me build you a portfolio that’s tailored to your specific investment goals, temperament and financial situation. That’s just one of the many ways you benefit when you become a client of our portfolio management services. Backed by my in-house team of investment experts, I’ll work to protect your money during times of market turbulence — and maximize your profits when the market rises. Click here to learn more about how you can profit from our Successful Investor portfolio management services.

In the early chapters of any good book on fundamental stock market advice, you will come across the two basic ways to make investment decisions: bottom-up and top-down.

Using the bottom-up approach, you focus on understanding what’s going on, rather than trying to predict what happens next. You could call this descriptive finance. You delve into earnings, dividends, sales, balance sheet structure, competitive advantages and so on.

From there, it quickly becomes obvious that there’s an awful lot you don’t know about the risks in the investments you are considering. So you try to design a portfolio in which the risks offset each other.

Using the top-down approach (which you might call predictive finance), you downplay what’s going on now and try to figure out what happens next. You may zero in on trends in stock prices, the economy, interest rates, gold and so on. You may disregard most details. Or, you may focus on a single key trend, event or detail, such as the Y2K scare that gripped the world in late 1999, the Internet stock boom, avian flu, or the future of the electric car.

In any one year, top investment honours often go to a top-down advisor. When enough people offer opinions about the future, after all, somebody has to get it right. But nobody gets it right every time. Anybody who did would eventually acquire a measurable share of all the money in the world, and nobody ever does that.

That’s why there’s a lot of turnover in the top ranks of top-down investors. One bad guess can ruin a previously enviable record.

Don't take chances with your retirement nest egg. Protect your portfolio and make it grow with expert advice from Pat McKeough, cited by The Wall Street Journal as "one of only four investment newsletter advisors who have managed to serve their readers well over the long haul." Click here to learn how you can profit from Pat McKeough's The Successful Investor newsletter.

Stock market advice: Why gains accumulate for bottom-uppers

Over periods of five years and beyond, however, top investment honours mostly go to a member of the bottom-up crowd. That’s partly because bottom-uppers tend to make fewer big mistakes. This lets their gains accumulate. This also leads to longer holding periods, which provide greater tax deferral and lower brokerage costs.

The top-down approach appeals to beginning investors, when they have not yet learned how little they know. (That’s a good time for it, when you have little money to invest and can’t do yourself much harm.) By the time they build up enough of a stake to begin serious investing, most advisors and investors have settled on a mix of top-down and bottom-up. As years pass, successful investors tend to put more weight on bottom-up. They like the way it cuts risk.

Sometimes, a top-down idea acquires way too much influence on way too many investors. A good current example is the intense interest that built up for many months over the European debt crisis and a possible eurozone economic collapse, if not a worldwide collapse. Week after week, in every edition of every newspaper you could find one or more articles delved into how that might occur, and the devastating financial results that would follow.

This widespread attention tends to get priced into the market, as traders say. In other words, investors react to this kind of potential calamity by paying a little less for investments than they otherwise would. As a result, you can buy good investments for less money.

In the past few months, European authorities have crept tentatively, and often nervously, towards a final resolution of the crisis in Greece. Even so, the markets have been rising and the predicted collapse has not occurred.

To put it another way, if the risk of an economic collapse in Greece—or Portugal or Spain or Italy—tempts you to sell all your stocks and go into cash (as traders say), keep one thing in mind: you’re not the only person who knows about that risk.

If you’d like me to personally apply my time-tested approach to your investments, you should consider becoming a client of my Successful Investor Wealth Management service. Click here to learn more.

Just a few years ago, the North American automobile industry was in a deep slump and some long-established names appeared to be on the verge of failing. But while General Motors is still struggling to regain profitability, its biggest Detroit rival has engineered a strong turnaround and is making expansion plans.

FORD MOTOR CO. (New York symbol F; www.ford.com) is the second-biggest carmaker in the U.S., and the world’s fifth-largest.

The company continues to benefit from its restructuring plan, which it implemented in 2005 to deal with its falling sales and market share. In the years since, Ford has sold its Jaguar and Land Rover luxury car divisions, closed factories and laid off workers.

In 2011, the company sold 5.7 million vehicles, up 7.2% from 5.3 million in 2010. Sales rose 11.3% in North America, 7.5% in Asia, 3.5% in South America and 1.8% in Europe. Ford now accounts for 16.5% of all car sales in the U.S., up from 16.4% in 2010. It also has 8.3% of the European market, down from 8.4% in 2010.

Don't take chances with your retirement nest egg. Protect your portfolio and make it grow with expert advice from Pat McKeough, cited by The Wall Street Journal as "one of only four investment newsletter advisors who have managed to serve their readers well over the long haul." Click here to learn how you can profit from Pat McKeough's The Successful Investor newsletter.

Stock market investment: Ford resumes paying dividends

Revenue rose 12.7% in 2011, to $136.3 billion from $120.9 billion in 2010. Earnings jumped 208.1%, to $20.2 billion, or $4.94 a share. However, that’s mainly due to an $11.5-billion tax benefit. The company earned $6.6 billion, or $1.66 a share, in 2010.

Ford plans to invest some of its rising profits in the 15 new models that it plans to introduce over the next few years.

The company will probably earn $1.48 a share in 2012. The stock trades at 8.1 times that forecast. Ford also recently resumed paying dividends. The annual rate of $0.20 a share yields 1.7%.

In the latest edition of Wall Street Stock Forecaster, we look at the potential rewards—and risks—of Ford’s international expansion plans, including a deal with Russia’s second-largest carmaker. We conclude with our clear buy-hold-sell advice on the stock.

You can get Wall Street Stock Forecaster, with our advice on leading U.S. stocks written especially for Canadian investors, along with “My #1 U.S. Stock Pick for 2012” as well as FREE access to our weekly Email/Telephone Hotlines when you subscribe now. And as a new subscriber you can save $50.00 on an introductory subscription. Click here to get started right away.