NutriSystem, Inc. (NTRI) is a stock that has gotten clobbered over the past 12 months. Around this time last summer, the stock was trading at $70 per share. Today NTRI closed at $16.27.
NutriSystem went public a few years back along with other weight management companies like weight watchers, jenny craig and some others that I can't think of right now.
NutriSystem was clearly a growth stock just after it went public. For the last 5 years, revenues grew 95% and net income grew at 116%. Clearly, this growth rate was not sustainable and when the market figured out that growth was slowing down at the company, the stock got whacked. This seems to always happen with growth stocks. They are growing like crazy and have ridiculous nose-bleed valuations, but the stock price keeps going up so investors keep piling into the stock. As soon as the market senses that the growth rate is slowing down for a growth stock, WATCH OUT! The stock is going to drop like a rock.
Today I consider NTRI to be a value stock. The company has no debt on it's balance sheet, a gross margin of 50% and a net margin of 10%. The company is definetly in a growing business of trying to help people lose weight, which clearly needs to happen, at least in the United States.
The market dumped the stock when the over the counter drug "ally" was first introduced. Analysts thought there would be no need for NTRI when all you had to do was pop a pill.
The market for weight loss is competitive, but it is also a very large and growing market.
You can buy NTRI for 5.2 times cash flow. This is an extraordinary value when you consider that the weight management industry as a whole trades at 23 times cash flow and the S&P 500 trades at 12.5 times cash flow.
I would buy NTRI up to $17.00 per share and then sit and be patient for the rest of the market to catch onto this value stock. In the meantime, I recommend selling some covered call options on NTRI to generate some income and additional source of return while we are waiting for the stock to increase.
Look to the December 2008 $22.5 strike that is currently selling for around $.85. The ticker symbol on this option is "NSILX.O" on the Charles Schwab platform. Check with your broker if you are using a different platform.
Assuming you bought the stock at a price of $17.00 or better, NTRI would have to rise 32%, to the strike price of $22.50, before the option would be in the money. Yes, we are giving up some upside here by selling the covered call option position, but I don't think that a 32% gain in 6 months is anything to be disappointed with. Especially in this current market environment.
Whether the stock rises or it falls after we buy it, we are still generating $85 in option premium income for every option contract that we sell. Remember, put and call options always trade in 100 share blocks of stock.
Good luck with you investing.
Monday, July 14, 2008
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