Weight Loss Stock Medifast Will Fatten Your Wallet

July 1, 2009

It's no secret that obesity has become an epidemic in the United States. A new report just came out that said not only are Americans overweight, but we're getting fatter.

The worst part is that problem will only get worse because we're seeing an alarming trend of obesity in children. Consider that in 30 states, nearly one-third of children aged 10 to 17 are obese. This is the single most important variable that determines obesity in adulthood.

As an investor, it's important to watch children for investing trends. Remember, it was baby boomers like me who spurred new businesses, like television, and the huge growth for entertainment stocks, like Disney (DIS).

The influence of young people has also been a major factor in the success of stocks like Apple (AAPL) and Google (GOOG).

That's why I've been focusing on stocks that are working to fight the obesity epidemic. My favorite right now is Medifast (MED). I also like the weight loss biz because it thrives no matter what troubles plague the broader economy.

Since 1980, Medifast has engaged in the development, production and distribution of health and diet products under the marketed brand names Medifast, Take Shape for Life, Hi-Energy Weight Control Centers and Woman's Wellbeing. The company's approach to weight loss focuses on meal replacement shakes and protein bars (among other food/drink items), as well as disease management products for diabetics. Medifast sells its wares online and through doctor's offices.

Medifast Sees Earnings Growth of 70%

While its customers are thinking thin, Medifast is packing on the profits: In the first quarter of 2009, Medifast's earnings rose 70% to $2.5 million or 17 cents per share, compared with $1.4 million or 10 cents per share in the same quarter a year ago.

During the same period, the company's sales rose 33.7% to $33.7 million, compared with $25.2 million a year ago. Medifast's operating margins continue to expand, so its earnings growth should continue to exceed its impressive sales growth.

Thanks to soaring profits, the stock has been on fire lately. In the last two weeks of June, shares of Medifast gained over 40%. The stock just hit another new 52-week high. In slightly more than three months, Medifast has doubled.

I also like the fact that Medifast was just added to the Russell 3000 Index, which means that index funds are required to buy it. This also means that more institutional investors will be allowed to buy shares of Medifast.

The next earnings report will be coming out in just a few weeks, and I'm expecting more great results. After the last earnings report, the stock jumped 24% the next day–and from there it rallied another 64%!

The consensus on Wall Street is for 17 cents a share, which sounds like a big improvement over the 11 cents a share Medifast earned in the second quarter of 2008. But in my opinion, Wall Street is way too low. I see Medifast's earnings coming in at at least 20 cents a share.

Since bathing suit season is upon us, there's no better time to get behind a weight loss company than right now. Medifast is a very strong buy.

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