Fatten up Your Portfolio by Cashing in on Getting Thin

Jason is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

America is getting fat. 

Obesity levels amongst almost all age groups is on the rise.  From the Centers for Disease Control:

"By state, obesity prevalence ranged from 20.7% in Colorado to 34.9% in Mississippi in 2011. No state had a prevalence of obesity less than 20%. 39 states had a prevalence of 25% or more; 12 of these states had a prevalence of 30% or more."

There are serious health implications to this, as we all know.  The National Conference of State Legislators website shows the financial impact that this trend is already having on healthcare costs on a by-state basis, and the numbers are startling.  Worse than that, they will continue to rise as the obese population ages. 

However, the re-election of Barack Obama to the Presidency, and the increased number of Democratic representatives in both houses of Congress, all but assures that the Affordable Care Act (Obamacare) will move forward.  And while most will acknowledge that Obamacare has its flaws, access to health care providers will likely make it easier for those that are obese to get medical care, especially those that are lower income. 

Some say that now is a great time to consider investing in health insurance giant UnitedHealth Group (NYSE: UNH), including fellow Fool Blogger Matthew DiLallo.  And while there should be a larger pool of insured moving forward, I remain unconvinced that this will generate larger profits, especially with so much groundswell around reducing healthcare costs.  UnitedHealth Group will certainly be one of the largest beneficiaries of the increased numbers of the insured, but there are more lucrative opportunities to generate a larger return than this insurance behemoth would give you.  With nearly 100 million insured today, there's only so much growth for a company the size of UnitedHealth Group. 

Stop Beating Around the Bush.  What's the Skinny?

Funny choice of words.  While "skinny" may not be apropos, there is definitely another growing trend in America, as another large segment of the population is increasingly choosing organic and "natural" foods. 

One only has to look at the success of grocer Whole Foods Market (NASDAQ: WFM) to know that there is a growing demand for better choices.  With revenues up over 20%, same-store sales up over 8%, and total store count less than 1/4 of what the company projects, the most recent quarterly numbers indicate a significant opportunity for investors for years to come.  Just don't let the price/earnings ratio of 35 scare you off. 

On the supplier side, "healthy" packaged foods manufacturer ​Hain Celestial (NASDAQ: HAIN) ​is rapidly expanding its footprint.  With dozens of established brands of natural and organic packaged foods, including popular names like Greek Gods yogurt, Celestial Seasonings teas, Rice Dream, Yves and Ethnic Gourmet just to name a bare few, Hain Celestial is already a leader in many segments of the packaged food market.  Taking a play from the Starbucks playbook, it recently acquired New York-based raw juice manufacturer BluePrint on the heels of a record-breaking first quarter. 

Another company with a p/e ratio in the '30s, it's important to remember that there is a price to pay for quality companies that are growing at the rate of Hain Celestial.  To paraphrase Warren Buffett, I would rather pay a little bit too much for a great company that's growing by 20%+ annually than get a steal of a deal on a company with limited prospects.  It's not just about what you pay.  What you get is FAR more important. 

Here's what Hain Celestial and Whole Foods investors got this year: 

<img src="http://media.ycharts.com/charts/021bbba40c8253d2d928a13e6d74ecc7.png" />

WFM data by YCharts

Okay, so healthy foods can help grow a healthy portfolio.  Where am I making money in the weight-loss game?

Spot-on.  Simply buying healthy foods is only a small part of the picture.  Those battling obesity have to make lifestyle changes, including increased physical activity, better portion control, and most importantly, having a support system in place to help with accountability and motivation.  That's where Weight Watchers (NYSE: WTW) comes in.  

For more than 50 years, Weight Watchers has been helping people lose weight by making sustainable changes to their lives.  This includes measuring activity, food consumption, and weekly meetings to measure results, get feedback from others dealing with similar challenges, and find accountability.  Factor in recent investments focused on mobile (eTools,) and Weight Watchers has made it even easier and more convenient for users to access the tools to maximize their weight loss, and with a proven track-record of keeping it off.  As a matter of fact, recent studies indicate that Weight Watchers is at least as effective as clinical weight-loss programs supervised by a medical professional. From WebMD:

"But more than one-third of the Weight Watchers participants lost 10% or more of their starting weight by the end of the study, compared with 15% in the combined group and 11% in the professional weight loss group."

Simply put, Weight Watchers has demonstrated the ability, in clinical studies, to help more people lose more weight.  And that's a very powerful statement to be able to make. 

And if the recent quarterly earnings announcement (and subsequent 16% share price pop) are any indication, the investments into eToolstha and better marketing efforts are taking effect.  Factor in a current share price that's still more than 8% below the price a year ago, and still well off its high this spring of over $81, and you have a real bargain.  For you value-seekers, the trailing P/E is still near the 12-month low, below 14.  The market is saying that there's no room for Weight Watchers to grow the business of shrinking waistlines. 

<img src="http://media.ycharts.com/charts/9e8f35ab627193c4d134e085741c5480.png" />

WTW data by YCharts

What about Nutrisystem?  Nutrisystem's share price is an even better bargain, right?

Not so fast.  This article from Fool.com's Alex Planes says much better than I could why Nutrisystem (NASDAQ: NTRI) isn't a good buy today.  Their revenues are falling, and after a months-long search for a new CEO, they recently announced that Dawn M. Zier will be taking control Nov. 15.  From the press release:

"Joining Nutrisystem is a wonderful opportunity for me personally, and the logical next step in my career."

Doesn't exactly instill a lot of confidence, does it?  Okay, I admit I am cherry-picking a little bit, but the bottom line is that when the new CEO refers to the gig as the "logical step" in her career, it sounds like she views Nutrisystem as just a stepping stone.  With a company going through so many challenges to grow and create value, I don't hear a leader that's committed to the long view. 

<img src="http://media.ycharts.com/charts/06c730a8c23e705bcb1cb6e1ac882cf4.png" />

NTRI PE Ratio TTM data by YCharts

And as the chart above indicates, from a financial perspective this is a company in massive transition.  Income has plummeted on flat revenues, driving the share price into the basement even as the price/earnings has been pushed to insanely-high levels.  Frankly, Nutrisystem's new CEO has a pretty big turnaround task in front of her.  And while patient investors could do well, I would recommend staying away from this one until management has proven over a few quarters that it is heading in the right direction. And with Weight Watchers having already gone through a transitionary period and the numbers from the most recent quarter indicating the recovery well under way, investors have a winner ready to buy right now. Speculating on Nutrisystem's management being able to turn the ship isn't a smart bet.  At least not yet.  Most importantly, buying just because the share price has fallen is not a strategy.  Until the price hits zero, there's always room to fall.  

Why buy now? 

Simply put, the holiday season is upon us.  Grocers are entering into the most important part of the year, with a massive part of their annual sales occurring in the period starting before the Thanksgiving holiday and extending through New Years, now is a great time to add Whole Foods and Hain Celestial. 

It should be no surprise why adding Weight Watchers now makes sense.  Just Google "most popular new years resolution" and you will quickly see that "lose weight" or "get fit" is at or near the top of most every list.  Factor in the Spring and Summer bathing suit season, and Weight Watchers' cyclical business shows its strongest quarterly results in the beginnning of the year.  And historically, the valuation (and share price) tends to climb along with the increased revenues, meaning that the best value tends to be this time of the year. 

So time to add three companies to your holiday shopping list.  Now get out there and do some research before your buy.  After all, I'm just some guy with a blog, and it's your ​money. 


elihpaudio owns shares of Whole Foods Market and Weight Watchers International. The Motley Fool owns shares of Hain Celestial and Whole Foods Market. Motley Fool newsletter services recommend Hain Celestial, UnitedHealth Group, and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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