I started this post with an idea of screening stocks on Morningstar to find the top 3 which fit my stringent criteria:

• Morningstar rated A for Growth, Profitability and Financial Health.
• At least 4% dividend yield.
• At least 10% earnings growth over the past 3 years.

I had to change course however when I saw the results of my screen was a single stock: NutriSystem (NTRI).

Yup. The weight loss program based on prepackaged meals, and hocked by such names as Dan Marino, Jillian Barberie and Marie Osmond.

The original NutriSystem went bankrupt in the 90’s, but this new incarnation seems pretty fit at first blush.

The details.

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The compelling story.

Here’s where it gets interesting.
According to Dr. Michael Eades from his blog Protein Power :

“After taking care of thousands of people over the past 25 years I’ve come to understand the psyche of overweight people well. I got my first clue when I noticed that the dietary histories of the overweight people coming to see me had a commonality. … The average patient coming to see me had lost significant weight two or three times before. Most would put something like this: 1991 Jenny Craig, lost 50 lbs., 1993 NutriSystem, lost 38 lbs., 1996 Physician’s Weight Loss Center, lost 55 lbs.”

So far, so good but that’s a lot of competition. Or is it?

“The thing I found remarkable about this is that almost no one ever went back to the same place twice. I virtually never saw: 1991 Jenny Craig, lost 55 lbs., 1994 Jenny Craig, lost 60 lbs. It was always a different place each time.”

According to Dr. Eades experience, no single weight loss company or system has a loyalty advantage over the others. This still give NutriSystem the advantage in my mind because it is in a far better financial condition than its rivals. Note: Jenny Craig was taken private in 2002 after many years of financial loss, so it is difficult to know for sure what the financial state of the company is. Weight Watchers has anemic growth, half the yield and a rating of B in Growth and Financial health, with no rating for profitability.

But here’s the money quote from Dr. Eades that explains the psychology of the demographic so well:

“… the reason they are overweight is that they eat too much of the wrong stuff. I told them that if I had a magic wand that I could tap them with and make them instantly their ideal body weight, they would be back in my office in a year, overweight as ever, if they didn’t change the way they ate.”

It’s a client base that keeps coming back for more, and in times of increasing competition NutriSystem seems poised to not only survive but thrive.

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