Are Weight Management Stocks A Good Investment?

It is no surprise to anyone that obesity represents a major global health concern. According to fresh statistics, approximately 2.1 billion people, or nearly one-third of the world’s population, are obese or overweight. The obesity problem has been worsening in both emerging and developed countries and will continue to get even worse: more than 75% of people aged 15 and over are expected to be obese or overweight in Kuwait, Venezuela, Mexico, and the United States by 2018. This major health problem can lead to serious health complications, such as heart disease, diabetes, cancer, and other serious diseases. Hence, there appears to be an immense customer base for weight management companies, as the gravity of this life-threatening condition serves as a catalyst for future growth in this market. The U.S represents the largest weight management market in the world, accounting for roughly one-third of global sales. Nonetheless, there are a few factors that have been hindering growth in the weight management market, which includes natural weight loss practices, dwindling consumer confidence, and alternative prescription medicines. Nonetheless, given that more people are seeking to make major lifestyle changes to reduce their weight and improve their fitness, one can anticipate that the weight management market will continue to grow steadily in the foreseeable future. Having this in mind, the following article will lay out a list of five weight management stocks favored by the hedge fund industry, as well as discuss the recent performance of those companies. Some of the companies in question are not pure-play weight management companies, but do represent key players in the global weight management market.

At Insider Monkey, we track around 785 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details about our small-cap strategy).

#5 Medifast Inc. (NYSE:MED)

– Hedge Funds with Long Positions (as of December 31): 11

– Value of Hedge Funds’ Holdings (as of December 31): $99.76 Million

The number of hedge funds within the Insider Monkey database that were invested in Medifast Inc. (NYSE:MED) as of December 31 stood at 11, down from 14 on September 30. On the other hand, the value of their positions in the company climbed to $99.76 million from $95.10 million quarter-over-quarter, with those positions accounting for approximately 28% of the company’s outstanding common stock. The product portfolio of the Owings Mills-based weight-loss company includes weight loss, weight management, and healthy living meal replacements, snacks, hydration products and vitamins. Medifast generates revenue through four distribution channels that includes Medifast Direct, Take Shape For Life, Franchise Medifast Weight Control Centers, and Medifast Wholesale. The company’s Take Shape For Life represents the personal coaching division of Medifast, whose coaching network includes independent contractor health coaches trained to provide coaching and support to customers utilizing the Take Shape For Life platform. This sales channel, which accounts for 74.1% of total revenue, generated sales of $202.2 million in 2015, down from $206.7 million in 2014. The decrease was mainly driven by a smaller number of active Health Coaches and clients. The company’s 2015 total revenue was $272.77 million, down from $285.29 million in 2014 and $324.05 million in 2013. Shares of Medifast have declined by nearly 5% over the past 12 months and stand at a forward P/E multiple of 12.9, below the ratio of 16.7 for the S&P 500 Index. Jacob Gottlieb’s Visium Asset Management owns 1.35 million shares of Medifast Inc. (NYSE:MED) as of December 31.

#4 Nu Skin Enterprises Inc. (NYSE:NUS)

– Hedge Funds with Long Positions (as of December 31): 19

– Value of Hedge Funds’ Holdings (as of December 31): $111.81 Million

The smart money sentiment towards Nu Skin Enterprises Inc. (NYSE:NUS) declined significantly in the final quarter of 2015, as the number of funds with stakes in the company dropped to 19 from 29 quarter-over-quarter. Similarly, the value of hedge funds’ stakes shrank to $111.81 million from $175.95 million quarter-over-quarter. It should be mentioned that Nu Skin Enterprises is not a pure-play weight management company, but the developer of innovative consumer products has a product line that includes weight management and body shaping systems, as well as other anti-aging nutritional solutions and weight management products. Nu Skin Enterprises generated revenue of $2.25 billion in 2015, a 13% year-over-year decrease, partly due to foreign exchange headwinds. Aside from foreign currency fluctuations, the company’s top-line results were impacted by limited-time offer activity in 2014, which boosted revenue significantly during that year, and a lack of new product initiatives in the first half of 2015. The company’s bottom-line figure decreased to $133.0 million in 2015 from $189.2 million in 2014. Nu Skin Enterprises recently released disappointing revenue guidance for 2016, which stipulates revenue in the range of $2.1 billion-to-$2.15 billion versus analysts’ expectations of $2.26 billion. The stock is priced at 12.6-times expected earnings, below the average ratio for the S&P 500. Shares of Nu Skin Enterprises have lost 35% over the past 52 weeks, after having lost 3% in 2016. Royce & Associates, founded by Chuck Royce, trimmed its stake in Nu Skin Enterprises Inc. (NYSE:NUS) by 28% during the December quarter to 1.37 million shares.

#3 NutriSystem Inc. (NASDAQ:NTRI)

– Hedge Funds with Long Positions (as of December 31): 23

– Value of Hedge Funds’ Holdings (as of December 31): $123.60 Million

There were 23 hedge funds in our database with stakes in NutriSystem Inc. (NASDAQ:NTRI) at the end of December, down from 27 registered at the end of the previous quarter. The overall value of hedge fund positions also declined to $123.60 million from $146.86 million during the three-month period. The hedge funds which remained bullish on NutriSystem held almost 20% of the company’s outstanding shares. The provider of weight management products and services has seen its shares decline by 9% since the beginning of 2016. NutriSystem’s revenue is primarily derived from food sales, which includes the sale of food and supplements, as well as the shipping and handling charges billed to customers. Unlike the aforementioned two companies, NutriSystem’s revenue growth has been trending up in the past several years. The company’s revenue for 2015 totaled $462.61 million, an increase from $403.08 million in 2014 and $358.09 million in 2013. The revenue growth in 2015 was mainly attributable to a higher number of new customers, and higher on-program revenue, retail revenue and reactivation revenue. An increase in average selling price in 2015 relative to 2014 also positively impacted the company’s top-line results. Net income reached $26.14 million in 2015, up from $19.31 million in 2014 and $7.37 million in 2013. Shares of NutriSystem are currently trading at 14.9-times expected earnings, also below the forward P/E multiple for the S&P 500 Index. Jim Simons’ Renaissance Technologies reported owning 2.72 million shares of NutriSystem Inc. (NASDAQ:NTRI) in its 13F for the December quarter.

#2 Weight Watchers International Inc. (NYSE:WTW)

– Hedge Funds with Long Positions (as of December 31): 24

– Value of Hedge Funds’ Holdings (as of December 31): $263.95 Million

The hedge fund sentiment towards Weight Watchers International Inc. (NYSE:WTW) increased noticeably during the fourth quarter, with the number of funds invested in the company climbing to 24 from 14 quarter-over-quarter. What’s more, the value of these funds’ equity investments in the company increased to $263.95 million from a mere $25.52 million during the quarter. The push into this stock and the underlying reasons behind it is likely why all four other stocks in this list witnessed declines in hedge fund ownership during the same quarter. This glowing sentiment was mainly driven by the announcement that media mogul Oprah Winfrey acquired a 10% stake in the weight loss company in October. Shares of Weight Watchers are up by 39% over the past year despite having lost a whopping 40% since the beginning of 2016. Nonetheless, Oprah Winfrey’s involvement (she is a member of the company’s Board of Directors) and investment in the diet company has not driven up sales just yet, but her active brand promotion through social channels may start to pay off in the foreseeable future. The company’s products and services involve meetings conducted by Weight Watchers and its franchisees; digital weight management products sold through websites, mobile sites and apps; products sold at the aforementioned meetings; as well as licensed products sold in retail channels. Weight Watchers International’s fiscal year 2015 total revenue was $1.16 billion, a decline from $1.48 billion in fiscal year 2014, and from $1.72 billion and $1.84 billion in the 2013 and 2012 fiscal years respectively. The decline in the number of members attending meetings and the average product sales per attendee of the meetings adversely impacted the company’s top-line results in fiscal year 2015. Marc Majzner’s Clearline Capital acquired a new stake of 1.62 million shares in Weight Watchers International Inc. (NYSE:WTW) during the December quarter.

#1 Herbalife Ltd. (NYSE:HLF)

Hedge Funds with Long Positions (as of December 31): 31

Value of Hedge Funds’ Holdings (as of December 31): $1.79 Billion

The number of smart money investors with long positions in Herbalife Ltd. (NYSE:HLF) dropped to 31 from 32 during the December quarter, whereas the value of those positions grew to $1.79 billion from $1.67 billion quarter-over-quarter. The 31 funds stockpiled slightly more than 36% of the company’s outstanding common stock on December 31. Herbalife is not a pure-play weight management company either, but is rather a nutrition company that develops and markets weight management, healthy meals and snacks, and personal care products, among other things. The company’s net sales for 2015 declined by 9.9% year-over-year to $4.47 billion, mainly due to the strengthening of the green buck against other currencies and a decline in sales volume. However, Herbalife’s net sales grew by 4.7% year-over-year in local currency. The company’s 2015 top-line results were positively impacted by price increases and a favorable change in country sales mix, which resulted in a higher share of sales volume being sold in markets with higher prices. Net income for 2015 grew to $339.1 million or $3.97 per diluted share from $308.7 million or $3.40 per diluted share reported for 2014. Shares of Herbalife have climbed by 53% over the past 12 months and are currently trading at 11.8-times expected earnings. Carl Icahn’s Icahn Capital LP owned 17.00 million shares of Herbalife Ltd. (NYSE:HLF) on December 31, 2015.

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