Financial Advisors Look to Consumer Stocks for Safety as Market Continues to Reel - InvestingChannel

Financial Advisors Look to Consumer Stocks for Safety as Market Continues to Reel

After a solid rebound in the first week of November, it looked like the U.S stock market was ready to put its brutal October behind it and move on, perhaps chalking it up to nothing but the dreaded ‘October Effect’. Those hopes didn’t last long. The S&P 500 has since tumbled to new second-half-of-2018 lows, sliding by another 2.92% through November 23. The NASDAQ and Dow Jones haven’t escaped November unscathed either, declining by 3.11% and 3.30% respectively. Year-to-date, only the NASDAQ is hanging on to slight gains, while the other two major indexes are in the red.

While the market is unlikely to persist at this red pace for overly long, it’s clear that the global economy is slowing, driven by soaring interest rates and escalating trade disputes. In late-November, the Organization for Economic Cooperation and Development (OECD) lowered its global growth forecast for 2019 to 3.5% from 3.7%, which would also represent a drop from the 3.7% growth expected this year. 2019 growth for developing economies like those in Argentina, Brazil, and Turkey were all revised down by the OECD in November in comparison to the organization’s September forecasts, while Australia, Japan, and Germany were among the developed economies to also have their 2019 growth forecasts trimmed in November. In the case of North America, the United States’ expected 2019 GDP growth was left unchanged at 2.7%, while Canada’s was actually revised upward to 2.2%. However, Goldman Sachs is far less bullish on next year’s U.S economy, predicting GDP growth to fall below 2% in the second-half of 2019.

Some other recent economic indicators are showing worrisome trends. Existing-home sales fell by 5.1% year-over-year in October, the worst mark in over four years. Orders for durable goods from U.S manufacturers also suffered a large year-over-year decline in October of 4.4%, the worst result in 15 months. On the other hand, retail sales had a strong showing in October, climbing by 4.6% year-over-year and 0.9% from September, which lead to several retailers posting strong earnings results in November, including Walmart Inc. (NYSE:WMT).

Financial Advisors, however, were not looking at retailers for salvation in November. TrackStar, InvestingChannel’s official newsletter that captures and analyzes the trends of Financial Advisors, shows that the most searched stocks in November were Consumer Cyclical and Financial Services stocks, which accounted for 7 of the top 15 most searched for equities. Among the stocks drawing the rapt attention of Financial Advisors in November were:

  1. Starbucks Corporation (NASDAQ:SBUX)
  2. The Kraft Heinz Company (NASDAQ:KHC)
  3. Morgan Stanley (NYSE:MS)
  4. Citigroup Inc. (NYSE:C)
  5. Apple Inc. (NASDAQ:AAPL)
  6. Tesla, Inc. (NASDAQ:TSLA)
  7. Netflix, Inc. (NASDAQ:NFLX)
  8. Sanofi (NYSE:SNY)

However, let’s focus on one of the less heralded names among the top 20 and see why it drew the interest of Financial Advisors in November. That name is Medifast, Inc. (NYSE:MED), a $1.7 billion weight loss and nutrition company which has had a wild ride on the stock market in 2018 that fattened up its stock price and market cap. Between March 1 and September 12, Medifast shares feasted on gains of over 304%. However, since then they’ve given back 43% of their value, with the bulk of those declines coming on November 7.

On that day, Medifast announced third-quarter earnings that were anything but slim. Revenue jumped by 80.3% year-over-year to $139.2 million, while EPS of $1.14 was up by 107.3% year-over-year. The company’s growing cadre of active earning coaches also increased by 59.2% to 22,600, while the average revenue that each of them generated also rose by 22% to $5,781. While revenue beat estimates, earnings were a slight miss, which appears to be why the market put the stock’s share price on a diet, as that combination (higher than expected sales yet earnings that still don’t meet expectations) is one that investors don’t typically like.

Nonetheless, the selloff certainly seems like an overreaction on the surface, and one that Medifast took advantage of a week later by buying back $10 million worth of its shares. While that confident signal in Medifast’s long-term growth may have been noted by Financial Advisors, it may not be enough to declare the stock a bargain at this point. Medifast shares are still up by over 100% in 2018 and trade at over 38-times the company’s trailing 12-month earnings. Nor is this the first time Medifast’s shares have binged on huge gains over a relatively short period of time, only to cough them back up again over the following months as the market seemingly regained its senses about the company’s growth prospects, a scenario that could be playing out yet again.

It’s also true that Medifast is a different beast now than it was then, being driven to new heights by its Optavia brand, which was only introduced in the middle of 2016 and yet already accounts for 70% of the company’s sales (as of Q3), up from 46% a year earlier. The strength of that brand can be chalked up to Medifast’s transition into more of a multi-level marketing company that has modeled itself after the likes of Herbalife Nutrition Ltd. (NYSE:HLF), relying on knowledgeable and motivated sales reps (called “health coaches” in this case) to push its brand. This transition is clearly a massive improvement over the company’s old focus on corporate owned centers.

Medifast is also planning to expand to other markets, which could drive further growth, including plans for Optavia to debut in the Hong Kong and Singapore markets in the first-half of 2019. And that earnings miss that investors took so hard? That was partially due to heightened expenses related to enhanced training and development efforts that Medifast believes will bear fruit in the quarters to come.

There’s clearly a lot here to interest Financial Advisors as they consider which side of the Medifast divide they fall on: the side that thinks the company’s valuation has grown too bloated, despite the November pullback, or the side that thinks Medifast’s bulging market cap is only an appetizer before the main course.

 

 

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