UBS Called Novo Nordisk a 'Value Trap.' Here's the Other Side of That Argument.

UBS analyst Michael Yee clearly preferred Eli Lilly (NYSE: LLY) over Novo Nordisk (NYSE: NVO) in a recent discussion with CNBC. Describing Eli Lilly as a growth company and Novo Nordisk as a value stock, he suggests that investors are more interested in growth today. While Yee may not be wrong about investors' preference for growth, he may be going too far by calling Novo Nordisk a value trap. Here's why.

What is a value trap?

A value stock is a stock that is trading cheaply relative to its own history, the market, or other companies in the same industry. Often, a value stock is facing business headwinds of some kind. A value trap is a stock that has value characteristics, but that is unlikely to overcome the headwinds it faces. Or at least, it isn't likely to overcome them within a reasonable time frame.

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Time is the key variable in UBS analyst Yee's take on Novo Nordisk. He is entirely correct that investors are favoring Eli Lilly today, which was actually second to market with a GLP-1 weight-loss drug. The fact that its GLP-1 option was more effective, coupled with capacity constraints at Novo Nordisk, allowed Eli Lilly to take the lead in a new drug category that Novo Nordisk created.

Novo Nordisk has been playing catch-up. That said, Novo Nordisk's GLP-1 pill has gotten off to a very strong start. Yee gave the company credit for that, but noted that the GLP-1 market is still working with the first round of weight-loss drugs. The pharmaceutical sector is highly competitive and driven by research and development; newer versions of GLP-1 drugs are already on the horizon.

Novo Nordisk needs to prove its chops

This is where things get interesting for investors. Yee effectively believes that Eli Lilly's current success in the GLP-1 space indicates that it will continue to succeed. That may very well be true, noting that Eli Lilly is working on new GLP-1 drugs, but it has notably been using its GLP-1 profits to broaden its drug pipeline into new areas. Novo Nordisk is betting more heavily on GLP-1 drugs, so it has to get its weight-loss research and development right if it wants to return to growth.

Basically, it looks like Eli Lilly has more opportunities for success than Novo Nordisk. And despite Novo Nordisk's GLP-1 pill performing well, investors are in a show-me mood, waiting to see whether it can expand its GLP-1 portfolio beyond Wegovy. That's not unreasonable, but it overlooks the fact that Novo Nordisk was first to market with a GLP-1 injectable and a GLP-1 pill. So far, it looks like the leading innovator in the GLP-1 space, even if it doesn't have the leading GLP-1 drug. In fact, UBS's Yee even believes that Novo Nordisk will, eventually, turn its business around.

So the real question here is likely about timing. If you are looking at the near term, Novo Nordisk still has a lot of work to do. And, in the short term, it is probably a value trap. If you are thinking five to ten years out, however, the company is highly likely to get back on track. That's a considerable amount of time, but you are also collecting a well-covered 4.7% dividend yield as of this writing. You are getting paid very well to wait for what even Yee believes will be an eventual rebound in the business.

What's your time frame?

UBS's Yee is absolutely correct that Eli Lilly is better positioned right now. He's also correct in stating that Novo Nordisk has a lot to prove. However, calling Novo Nordisk a value trap is likely considering it only as a short-term investment. If you think long-term and have a focus on income, you may actually see it as a high-yield turnaround story. And given the company's early success in developing GLP-1 drugs, it has already demonstrated strong R&D capabilities. For investors who think in decades and not days, it is probably worth a deep dive.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Eli Lilly and Novo Nordisk. The Motley Fool has a disclosure policy.