Bad habits are hard to change, making stock in Weight Watchers (NYSE: WTW) appealing. In an industry dominated by snake-oil remedies, quick fixes and faddish diets, Weight Watchers’ clinically proven, decades-old approach to weight loss management and behavior modification stands apart.
On the heels of recent marketing missteps, an ill-timed share repurchase (that ballooned its debt burdens), and broader concerns over the health of its online and meetings businesses, Weight Watchers’ shares have shed a few pounds – roughly 25 percent off 52-week highs, and 40 percent from all-time highs set two years ago.
The result: a capital-light business with sustainable competitive advantages, a history of superior returns on capital and excellent cash generation that sports a price-to-earnings (P/E) ratio near 10.
The stock market has priced Weight Watchers as a business in decline, but its target market is only getting, er, larger. To wit: According to the World Health Organization, worldwide obesity has almost doubled since 1980, and worldwide, more than a billion adults are considered overweight.
Risks include competition, weight-loss drugs and management missteps, but the recent low price seems to have factored those in. The market is likely to add meat to these shares’ bones.
Ask the Fool
Q: I’ve got $500 available per month. Should I pay down my mortgage faster with it, or invest it in a stock market index fund? – C.N., Sacramento, Calif.
A: Think of it this way: If your mortgage interest rate is 5 percent, then any extra principal you pay off will save you 5 percent in interest payments – which is like earning a 5 percent return.
Meanwhile, if you hope to earn the market’s long-term average annual return of roughly 10 percent in stocks, then that’s clearly more compelling than the 5 percent. Remember, though, that the 5 percent is much more of a sure thing than the 10 percent.
Paying off your mortgage early is often worthwhile. That’s especially true if you’re nearing retirement, as it’s best not to be making mortgage payments in retirement.
Q: What does it mean if a stock is “trading below cash”? – L.R., Kankakee, Ill.
A: It refers to a company that has more cash in its coffers than its entire market capitalization. In other words, it has more cash per share than its share price – and is therefore very enticing to many investors, making them think it can’t help but be a bargain.
But hold on. The money is probably being spent, and it might not be there for long.
Many companies in trouble have a high “burn rate,” meaning that significantly more money is going out than is coming in. As the folks at investopedia.com have explained, “Even a palace isn’t worth much if it’s on fire.”
Still, it can be well worth looking for healthy, growing companies with lots of cash and relatively low prices. They just don’t need to be trading below cash.
My dumbest investment
Decades ago, I took a client’s advice to buy silver. Lots of people were buying it, and the price had risen to $25 per ounce. I bought $1,500 worth. Then, in 1980, as you might remember, silver took a dive, and I managed to sell my holdings for about $700.
The problem was that two brothers, the Hunts, had been buying up much of the world’s silver, aiming to corner the market and driving up its value. But they did so by borrowing a lot of money, and when they stumbled, the price of silver crashed hard. I learned the hard way how volatile commodities can be. – J.M., online
The Fool responds: People sometimes add gold or silver to their portfolios as extra diversification and protection. But precious metals and other commodities can be risky and volatile, too.
Between late 1979 and early 1980, during the Hunt frenzy, the price of silver soared from less than $10 per ounce to more than $50. Recently, it has been valued around $19 per ounce. Meanwhile, gold has fallen some 33 percent from a high in October.