6 Stocks to Profit from the Battle with Obesity
Wider waistlines around the globe have created a feeding frenzy for companies that fight fat with either pills or programs, as well as the retailers that specialize in healthy eating and exercise.
Indeed, stocks in the “healthy and tasty” theme, which include the likes of Whole Foods Markets and vitamin retailer GNC Holdings, have trounced the market lately. Over the past year through August 3, healthy stocks earned a healthy 28.5%, according to Motif Investing, an online broker that allows individuals to invest in baskets of stocks connected by a common theme. Over the same period, the total return for Standard & Poor’s 500-stock index was 12.8%. Fighting fat is a “megatrend” sure to drive the stocks of dozens of companies over the coming decades, according to a report from Bank of America/Merrill Lynch.
With roughly 1.4 billion people classified as overweight and some 500 million considered obese worldwide, the potential impact on companies in many industries -- from biotechnology to food -- is enormous. Even governments are likely to engage in the battle against fat because obesity-related illnesses are placing an increasingly heavy burden on public medical insurance programs, according to the Merrill Lynch report.
What obesity-fighting stocks might deliver hefty profits? Our picks fall into three broad areas.
Vivus (symbol VVUS) recently won government approval for its obesity-fighting drug Qsymia. Clinical trials found that the drug was highly effective in helping obese patients cut excess body fat by as much as 10%, says Needham & Co. analyst L. Alan Carr Jr. Carr believes the drug could generate $3 billion in sales once it’s launched later this year, which could turn the money-losing biotech company profitable in a hurry. In fact, expectations are so high for the drug that Vivus shares have nearly quadrupled over the past year.
But because of a patent issue, it’s not yet clear sailing for Vivus. Qsymia contains two previously approved ingredients, Phentermine and Topiramate. But Johnson & Johnson has an existing patent to use Topiramate in weight-loss medications. Carr thinks the competing patent will simply cause Vivus to price the cost of royalty payments to J&J into Qsymia’s retail price.
Vivus is not yet profitable. Analysts expect the Mountain View, Cal., company to lose 83 cents per share, or $83 million, this year and earn 58 cents a share, or $57.8 million, in 2013. Carr rates the stock a buy and expects it reach $38 in a year, a 70% premium over its current price of $20.92 (prices and related data are as of August 3).
Investors with a taste for risky low-priced stocks should consider EnteroMedics (ETRM), says analyst William Plovanic, of Canaccord Genuity, a Canadian investment firm. The St. Paul company is in the midst of a second clinical trial for an implanted medical device that cuts the “I’m hungry” signal before it transmits from stomach to brain. So far, it appears that Entero’s “neuro-blocker” won’t cause patients to lose quite as much weight -- or lose it as quickly -- as some of the alternatives, such as gastric-bypass and Lap-Band surgeries. But the side-effects are less severe, too. By changing the gastrointestinal tract, the other options require that patients subscribe to nutritional supplements for life, says Plovanic. The neuro-blocker, by contrast, is more like a pacemaker -- it simply makes patients less hungry, and when patients eat less their stomachs shrink naturally over time.
Entero trades at $3.38 putting it in penny-stock territory and underscoring the stock’s riskiness. Moreover, the first round of clinical trials didn’t go particularly well. If the problems have been fixed, as Plovanic thinks they have, the stock could easily jump 25% within the year, he says. If they haven’t, the stock could take a big hit. Analysts expect the company to lose money this year and next.
Of course, the best way to lose weight is through healthy diet and exercise, and those who hope to lose weight this way have been turning to Weight Watchers International (WTW) for almost 50 years. But the company’s push to expand its Web-based offerings and raise its profile through an expensive advertising campaign caused both the first-quarter results and the stock price to tank earlier this year. Weight Watchers, which was selling for $81 in March, now fetches $ 44.43, largely because first-half profits declined 17.7% from the same period a year earlier, says Wedbush Securities analyst Kurt Frederick
Frederick has a hold rating on the stock. But the company’s long-term potential is terrific, he says. The boosted expenses causing the short-term hurt are raising the company’s profile and allowing it to bolster its online business, which may prove the key to long-term growth. While online customers pay less than those attending meetings in person -- $19 per month compared with $43 -- online revenues are also growing at a blistering pace, up 33% from this time last year, he notes. When the spending stabilizes, earnings are likely to rise solidly. He projects that the stock will be worth $68 within a year. Morningstar analyst Peter Wahlstrom is even more enthusiastic. He thinks the company is worth $77 a share today. Analysts on average expect New York City-based Weight Watchers to earn $4.58 per share this year, an increase of 11% from 2011, and see a gain of 17%, to $5.38 per share, next year.
As more people move from the couch to the athletic field, The Finish Line (FINL), a retailer of athletic apparel, shoes and accessories, should benefit. The company launched a revamp of both its online presence and its brick-and-mortar stores this year. That has cut into profits -- a drag that’s likely to continue throughout the year. But Canaccord Genuity analyst Camilo Lyon thinks the investment is pivotal to the company’s long-term competitive position. The company is just pacing itself for a long run, he says, and with the stock, at $21.23, selling for just 13 times the average analyst earnings estimate of $1.65 per share for the fiscal year that ends next February, risk is limited. Lyon expects the stock to sell for $25 within a year.
Vitamin retailer GNC Holdings (GNC) has also been going strong, thanks to new store openings and the creation of a slew of new products. In addition to selling vitamins, the Pittsburgh-based company manufactures its own series of weight-loss and nutritional supplements.
Second-quarter earnings blew past analysts’ estimates, with sales rising 19% and profits soaring 85% from the second quarter of 2011. Even accounting for some one-time items in the 2011 period, profits still leaped 61% from year-ago levels. The stock, at $39.21, sells for a not-so-cheap 17 times estimated 2012 earnings of $2.23 per share, an increase of 40% from the year-earlier quarter. Still, Wedbush’s Frederick considers it a bargain. He believes GNC stock will sell for $47 within a year.
Concerns about the effect of processed foods on weight and health have caused sales of organic foods to soar nearly 20-fold over the past two decades, and Whole Foods Market (WFM) has been one of the primary beneficiaries. The Austin, Tex.-based grocer has been growing at a double-digit percentage rate for years and appears primed to continue the breakneck pace. In Whole Foods’ third fiscal quarter, which ended July 1, earnings soared 32%, to $117 million, from the same quarter a year ago. The company also announced a 40% boost in its quarterly dividend, to 14 cents a share late last year.
The stock, at $94.60, is not statistically cheap, selling for 33 times estimated earnings of $2.90 per share for the fiscal year that ends September 2013. Even so, analysts at William Blair & Co. say that Whole Foods’ ability to grow rapidly while controlling costs makes the stock one of their top recommendations. S&P Capital IQ analyst Joseph Agnese rates the stock a buy, predicting that the shares will sell for $103 within a year.
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