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Investors receive feedback from the market on a frequent basis based on the stocks we select for our portfolios. While the price of a security can change on daily news flow, my experience indicates the most money can be made by picking companies for the long-term on strong fundamentals.
One of my mentors during college, David Gompert of tradeMONSTER, always stated “The market isn’t kind, but it’s a great teacher.” That advice has resonated with me throughout my career as I actively buy and sell in the market.
Consider the case of Life Time Fitness (NYSE: LTM), a $2 billion operator of multi-use sports and professional fitness centers. For readers who aren’t familiar, the company operates 105 centers under its namesake brand in 26 major markets across the United States. Life Time Fitness went public in July 2004 at $18.50 per share.
So what’s the story here? On Jan. 31, Life Time pre-announced results for the fourth quarter 2012 and provided 2013 guidance. The company stated that Q4 earnings per share would be $0.53 to $0.56 compared to analyst estimates of $0.66. Market participants reacted by selling the news, sending the stock in freefall. Shares fell from $50 to $39.66, more than a 22% drop and the company’s largest decline in a single day.
Here are four reasons why I believe Life Time Fitness is in better health than investors realize, and poised to leap over $50 per share by the end of 2013:
- The stock is trading at 15.7x price-to-earnings, the least expensive it’s been in the last 2 years. Revenue has grown 11% in the last 12 months, while earnings have grown 18%.
- The company stated that $0.07 of the Q4 miss was attributed to Hurricane Sandy. If one excludes this amount, management hardly missed estimates at all. Diluted earnings per share of $2.85 - $2.95 for fiscal year 2013 give the stock less than a 14x forward multiple, which is appropriate for a maturing company and not a mid cap growth stock.
- Board member Jack Eugster bought 3,000 shares of stock at $41.95 per share on Feb. 26, the first day that insiders were allowed to trade following the negative pre-announcement. Eugster is a retail industry veteran, having held positions with Target Corporation, The Gap, and Musicland Stores where he served as CEO.
- Wall Street firm Fetl and Company, headquartered in Minneapolis, spoke with the management of Life Time Fitness following the earnings pre-release. Fetl stated they view the company’s 2013 guidance as “extremely conservative” and recommend buying on weakness. Keep in mind that Life Time Fitness is also headquartered in Minnesota.
Consumer Discretionary is Strong
While not direct corollaries, other constituents within the S&P Midcap 400 Consumer Discretionary Index are reaching multi-year highs. Foot Locker (NYSE: FL) and Dicks Sporting Goods (NYSE: DKS), two of the largest consumer discretionary plays, are performing well and both companies are involved within retail and health/wellness.
Dick’s Sporting Goods has received praise from Barron’s and the Wall Street community in recent weeks, both attesting that the company offers growth at a reasonable price. Earnings at Dick’s have grown 12% in the last year, while revenue has grown a respectable 10%. In addition to consistent footwear and apparel sales, Dick’s has a growing golf category.
Foot Locker is a favorite of value investor Karen Finerman, and Wall Street believes the company is taking market share from competitor Finish Line. Revenue at Foot Locker has grown 8% in the last year while earnings have grown 50% from a weak base. The company reports earnings on Mar. 8 and I advocate buying the stock before the announcement. Foot Locker also increased its quarterly dividend to $0.20 a share, a sign of underlying business strength.
How do these retailers come into play with a gym membership? Life Time Fitness’ high-end sports club membership is arguably a discretionary purchase, and in my opinion the purchase of new sporting equipment (DKS) and tennis shoes (FL) go hand-in-hand.
Aside from Life Time Fitness, Town Sports International is the only other publicly-traded fitness club to my knowledge. However, I do not feel a comparison is appropriate as the two companies serve different demographics. The $220 million Town Sports is significantly smaller and concentrated in only four metropolitan areas.
Foolish Bottom Line
For track and field athletes, which hurdle is easier to clear, the “high hurdle” of 42 inches or the “high school high” of 39 inches? Aphorisms aside, Life Time Fitness management lowered the bar on their 2013 guidance, and the market reacted negatively with the largest single-day sell-off since LTM’s initial public offering in 2004.
While there are multiple reasons for insiders to sell, only one reason exists for insider buying. Jack Eugster bought 3,000 shares of stock at $41.95 per share, putting $125,850 of his own money on the line. The timing of the trade is also important, as Eugster bought on the first day he was permitted to do so following the company’s negative pre-announcement.
A near-term catalyst for Life Time Fitness is on Wednesday, March 13 when management presents at the UBS Global Consumer Conference in Boston. Readers will learn if the recent sell-off is warranted when the company reports first quarter 2013 earnings on Thursday, April 25.
My suggestion: Place a bet with the smart money, and I believe you will be rewarded in both the short and long-term.
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