This Healthy Stock Powers on in Good Times and Bad
July 2, 2010By: Frederick M. SteierArticles RSS feedPrintPrint

Back in May, I wrote about an unfortunate trend . America is getting fatter. The other unfortunate trend is that people generally fail when it comes to dieting.

Although I can't say dieting is an addiction like smoking, I can say that dieters, like smokers, just can't quit. That's great for any company designed to take advantage of this semi-addiction. And there's more than just one company that has figured out to profit

from it.

We know that products that take advantage of human weakness are big business. Altria (NYSE: MO) and Starbucks (Nasdaq: SBUX) have proven this concept. Even better are products that take advantage of failure.

Dieters are prone to failure because there are so many obstacles. Think about the percentage of people you know, including yourself, who have tried a diet and succeeded. Not many, right?

The truth is, the key to becoming a successful diet company isn't ensuring that people succeed with your product -- it's just that they keep buying it. It's all about marketing and becoming a recognized global brand. If a company can deliver the message that their plan will succeed where others won't, and do it convincingly, that's 90% of the battle. The rest is about having good customer service and good quality products.

Medifast (NYSE: MED), my other weight-watching discovery, has a lot going for it over other plans.

The company has actually gone to the trouble of having clinical studies done by researchers at Johns Hopkins. This physician seal of approval is critical because it bolsters another, more subtle, aspect of Medifast's success: Fear. Most of us are obsessed with health. We know obesity is a major factor in cardiovascular disease and cancer. We think about this every day and we all want the miracle diet to keep us safe. This is why these plans will always be in existence, fighting for market share.

I like Medifast for all of these macro reasons. In addition, the company has a 30-year track record. It has achieved that elusive brand-name status. Investors may be interested to know that much of senior management is comprised of former military members. This means investors should be able to count on a deliberate approach to success, along with carefully considered strategic moves and a great deal of precision regarding operations. It's also comforting to know that insiders hold 27% of the shares.

This kind of approach may not mean the company explodes the way Weight Watchers (NYSE: WTW) has, but that's fine with me. The stock has still had an extraordinary performance. And yet still with a market cap of about $460 million, that's only 25% the size of Weight Watchers.

The most incredible thing about Medifast is that even during this awful recession, net earnings for 2009 soared +150% year-over-year, on a +57% increase in revenue. The first quarter for 2010 continued the trend.

Free cash flow during the past four quarters comes in at just more than $22 million. As for debt, the company is true to its product -- it runs very lean with only $5.2 million, compared to nearly $21 million in cash and equivalents. This only serves to prove that the macro concept works -- good economy or bad, people will spend money to lose weight.

Action to Take --> I still love the Nutrisystem (NYSE: NTRI) story, but I love Medifast just as much.
I'd be comfortable owning both over Weight Watchers, which has been struggling for the past several years. If you believe Medifast could become as big as Weight Watchers one day, as I think could happen, then that means Medifast could be a 4-bagger going forward.

Frederick M. Steier
Contributor, StreetAuthority.com
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