Interested in Shorting Vitamin Sellers? -- from Barron's
Weekday Trader
Pumped-Up Vitamin Stocks Could Get Tired Blood
By Vito J. Racanelli
Americans seem to have a love affair with vitamins these days. As Baby
Boomers shuffle into middle age, they're popping more and more of those little pills from their local health food stores to ward off everything from cancer to osteoporosis to depression.
And though many doctors are still skeptical over their particular benefits, vitamin supplements have been flying off the shelves, taking the stocks of their manufacturers and retailers with them. Shares of these companies have handily outpaced even this bull market, as their stocks sit at or near 52-week highs.
Rexall Sundown, a vitamin manufacturer and marketer, closed Tuesday at $37 13/16, up almost 200% in the last 12 months. Not to be outdone, competitor NBTYÿ (formerly Nature's Bounty Inc.)ÿ has seen its shares soar 250% since lastÿ March, closing Tuesday at $53 3/16. Retailer General Nutrition Companies has nearly doubled in that time, andÿ herbal tablets maker Nature's Sunshine Products has gained "only" about 80%.ÿ
As usual, Wall Street is cheering on the winners, predicting earnings
growth rates of 25% to 30% for the industry over the next three years or so. After all, unlike drugs, vitaminsÿ aren't subject to dreaded
government oversight, thanks to a 1994 law that sharply limitedÿ the
ability of the Food and Drug Administration to regulate industry claims.
But just as it looks as though things couldn't get better, a few skeptics are sounding some cautious notes. Even some industry bulls have gotten increasingly skittish about these vitamin stocks' lofty share prices--and their growing downside risk.
Rexall Sundown, for example, sells at ten times sales and at
Coca-Cola-sized price/earnings multiples: the stock trades at 44 times
First Call's mean 1998 earnings estimate of 86 cents per share-nearly
double the projected P/E of the S&P 500. Sure,ÿ Rexall's P/E is a big
discount to the 65% earnings growth analysts expect in the fiscal year
endedÿ August 1998, but it trades at a huge premium to the projected long term growth of 25% to 30%. And Rexall'sÿ earnings growth isn't anywhere nearly as reliable as that of the famed maker of brand-name sugar water.
Sandesh C. Seth, an analyst at New York-based investment boutique
Commonwealth Associates, recently downgraded Rexall to Accumulate from Buy, based on the stock'sÿ valuation. Thoughÿ he still believes that Rexall will grow at "30% plus" over the next three years, Seth adds thatÿ "the growth can't justify a P/E of 40x. I don't think the company is going to grow that fast."
More skeptical still is Andrew Lassak, an analyst at Joseph Charles &
Associates, located in Boca Raton, FL.ÿ "In my eyes, NBTY is overvalued," he says flatly. And ifÿ that's true of NBTY, which sells at about 3.5 times revenue and 34 times earnings, Lassak saysÿ Rexall's valuation is even more troubling.ÿ "Is the market for vitamins going to grow 44% a year?," he wonders.
These analysts also worry that momentum investors have pumped money into theseÿ stocks, fueling their rise. "It makes me even more nervous" than the high P/Es, says Lassak. That means the slightest negative earnings surprise-or even a critical study about vitamins--could spark a stampede by the thundering herd.
And if the money going into these stocks doesn't start the alarm bells
ringing, the money leaving them could. Over the last six months and across the industry, corporate insiders--the folks who presumably know their business best--are selling into this unprecedented run-up and cashing in some of their stock profits.
Bob Gabele, who heads up CDA/Investnet, a Ft. Lauderdale, FL research firm that tracks buying and selling by corporate insiders, says the activity by officials at vitamin companies doesn't support the complacently bullish scenario.ÿ He calls it a "classic case" where "the expectations of insiders don't seem to confirm Wall Street's expectations."ÿ In fact, officials have been heading for the exits at Rexall, NBTY, General Nutrition and Nature's Sunshine.
At Rexall Sundown, for example, five insiders sold or filed intentions to sell a total of 503,000 shares between November 3rd andÿ January 12th, and for some these were "material" reductions, according to CDA/Investnet. Selling was similarly intense at the other high-flying vitamin companies: >From mid-December to mid-February seven NBTY Inc. executives announced they wouldÿ sell some 475,000 shares at prices ranging from $25 to $47 a share. "These sales far surpass annual sales totals by insiders for each year dating back to 1990," according to CDA/Investnet.
And insiders have even begun to cashÿ out at companies whose shares have had more modest appreciation in recent months. Since November, insiders at General Nutrition have unloaded more than half a million shares, according to the Federal Filings newswires, while at Nature's Sunshine Products eight company insiders dumped 230,000 shares since late last year.
Of course, with demographics going their way and increasing acceptance of vitamins by the public, these industry leaders appear set to take the lion's share of the expected 12%-15% overall industry sales growth over the next couple of years. But judging from their stock prices, investors are counting on far more than that. And if they don't get it, the valuations of these shares could quickly return to more "normal" levels. |
