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In Search of Fat Profits? Try Weight-Loss Companies

Fin - Breakout - US

As regular Breakout viewers know by now, this show is all about following, spotting and respecting trends. So when our producers, cognizant of the impending start of swimsuit season, pitched the idea of looking at weight-loss stocks as timely, profitable and trendy, we jumped right on board.

First some background: Two-thirds of Americans are overweight, and the trend, regrettably, is higher. In fact, analyst Kurt Frederick of Wedbush Securities figures that slice of the population will grow 3.7% a year until 2015. In the U.S., that means about 9 million more people will get on board a train that's already carrying 230 million overweight passengers.

"The weight management companies clearly have a large target market to tap domestically," Frederick says, adding that they've really barely scratched the surface here, let alone abroad.

Take Weight Watchers International (WTW) for example. With a market value of $6.3 billion, it is the industry leader and is more than 15 times larger than rivals NutriSystem (NTRI) and Medifast (MED). But even with all that size and recent growth, Weight Watchers serves less than 3 million people in the U.S., Frederick says.

Of those, about 1.8 million are online and just over 1 million are members via traditional meetings. As the company name suggests, he says, Weight Watchers International does about a one-third of its sales abroad, including Canada, the U.K., Australia and New Zealand.

Even so, Frederick says "wait for a pullback" before buying the red hot Weight Watchers. He's more optimistic about Medifast right now, the weight-loss stock he calls his "favorite long-term pick." He points to 80% annual sales growth for the past three years at its direct sales segment, the unit that accounts for 65% of total revenue. He's also highlighting the company's growth plans for its "weight control centers," or what he calls their "brick and mortar" segment, which is planning a six-fold increase in stores in three years that would take the total from 40 to 250 by 2014.

As for NutriSystem, he says there's still a confidence problem for investors who recall when this $14 stock was trading at $70 as recently as 2007. But it's not about the rear view, it's about the future, and Frederick says NutriSystem has cut costs, hired new chefs and will be launching a new menu line for 2012.

So weight management is definitely a niche play, but also one that has lots of upside and demographics working in its favor. Listen to the clip, see what you think, and let us know in the comments section below or via email at breakoutcrew@yahoo.com.