Daily Gains Letter

Cashing In on America’s Obesity Epidemic

By for Daily Gains Letter |

How to Play America's Obesity EpidemicI would be the first to admit that on occasion, I have a craving for donuts, fries, and junk food. Luckily, it’s not that often, and I manage to stick to a fitness program.

Yet overindulgence and rising obesity levels have become a crisis not only in America, but in many countries around the world. It seems as though as people get wealthier, they also become fatter.

I recently read that about a third of the world is now considered overweight, based on a study by Christopher Murray of the Institute for Health Metrics and Evaluation at the University of Washington. (Source: Cheng, M., “30 percent of world is now fat, no country immune,” Yahoo! Finance, May 29, 2014.) The research suggests that Americans are the fattest people in the world, accounting for a whopping 13% of the total. This shouldn’t be a surprise, given the amount of fast food people tend to eat.

Now, while the rising obesity levels are clearly an issue for the healthcare sector down the road, there are companies that are in the business of helping people shed the pounds—this is a sector you can play as an investment opportunity at this time.

A small-cap stock that is worth a look as an investment opportunity in this area is Medifast, Inc. (NYSE/MED), which has a share price of $31.14 and a market cap of $409 million. Medifast is a producer and seller of weight and disease management products, along with consumable health and diet products. The company’s product line is sold under the Medifast brand and includes meal replacements and vitamins for those trying to lose weight.

Based on my research, Medifast should do well trying to help America eat itself out of its obesity crisis and is, therefore, an investment opportunity that’s worth a look at this time.

Medifast Inc Chart Chart courtesy of www.StockCharts.com

On a quarterly basis, Medifast beat earnings-per-share (EPS) estimates in two straight quarters.

Revenues are estimated to decline 3.4% to $344.85 million this year, followed by a 2.9% gain to $354.78 million in 2015, according to Thomson Financial.

For 2014, earnings are estimated to rise to $1.83 per diluted share, followed by $2.04 per diluted share in 2015, according to Thomson Financial.

The stock trades at a reasonable 15.27X its estimated fiscal 2014 EPS; if it can deliver, this stock may be a good investment opportunity.

Based on an estimated five-year earnings growth of 17% annually, the price/earnings-to-growth rate (or PEG ratio) is attractive as an investment opportunity at 0.97.

Based on what’s happening in America, I like the prospects for Medifast as an investment opportunity.

Another small-cap investment opportunity in the health foods craze is Natural Grocers by Vitamin Cottage, Inc. (NYSE/NGVC), which has a share price of $21.01 and a market cap of $472 million. The stock was trading above $40.00, but has recently sunk to the $20.00 range, where I see above-average price appreciation potential as an investment opportunity.

Natural Grocers By Vitamin Cottage Chart Chart courtesy of www.StockCharts.com

Vitamin Cottage operates across the country and sells more than 25,000 organic and all-natural products comprising gluten-free products, USDA-certified organic produce, all-natural body care products, and a significant offering of vitamins, minerals, and herbs.

Clearly, the selling has been overdone and not based on weakening fundamentals, so I see an investment opportunity. In the fiscal second quarter (ended March 31, 2014), the company had sales of $130.34 million, up 22.4% year-over-year, versus $106.49 million in the year-earlier fiscal second quarter. The key same-store sales jumped a decent 5.7% year-over-year in the second quarter and 8.1% in the six-month period. Sales in FY14 are estimated by Thomson Financial to grow 21.3%, followed by growth of 29.8% in FY15.

So as America makes an attempt to slim down, the natural foods, health, and weight loss sector could be the investment opportunity you’re looking for to help fatten your portfolio returns.

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