Obesity Stocks Have Caught the Eye of Investors
Business + Economy

Obesity Stocks Have Caught the Eye of Investors


America's obesity epidemic is arguably showing up more in the results of public companies, but not always in the ways that companies want.

McDonald's sales are declining, and Coca Cola's latest results didn't give out too many smiles, either. Meanwhile, some "healthier" food options continue to gain: Chipotle Mexican Grill shares are up 15 percent this year, and General Mills recently paid $820 million for Annie's Homegrown.

Related: Budget-Busting Obesity Costs Climb Past $300B a Year

Still, for an investor who doesn't want to make a long-term bet that the average American will definitively give up their Coke and Big Mac, there are other ways to fight fat that can make the global population healthier, while making you wealthier.

Investing in obesity stocks has become a Wall Street trend. While recent performance of some companies suggest the thesis is running ahead of the actual results, the demographic numbers are eye-opening.

Some 84 million people in the U.S. struggle with obesity, a growing trend. In 2012, 35 percent of adults were obese, compared with only 14 percent in 1980, according to a National Health and Nutrition Survey. And estimates point to a larger girth in the future. Globally, more than 500 million people are obese, according to the World Health Organization. That number is slated to more than double by 2030.

"Diet and exercise aren't effective," said William Plovanic, medical technology equity research analyst at Canaccord Genuity.

Related: 11 Celebs Who Have Dieted for Dollars

In fact, given these round numbers, one place to start is medical devices designed to help people lose weight. In a recent report, Canaccord Genuity stated that obesity is the "next big thing in medical devices." The FDA is reviewing and expected to advance new technologies for obesity, since obesity costs to the health-care system are expected to nearly double by 2018.

"The device market is in its early stages," Plovanic said. "New products and technologies will help drive traction."

Plovanic has a buy rating on the medical device company EnteroMedics, which develops neuroblockers to treat obesity. Hunger is controlled with a pace maker–like device that blocks signals from the stomach to the brain. However, the firm is still waiting for FDA approval on its medical device and hasn't banked any revenues yet. In 2015, EnteroMedics' revenues are expected to start flowing, Plovanic said. "There is a huge market opportunity."

Forget Exercise—There's a Pill for That
From the biotech arena, obesity drugs also hold promise. Canaccord Genuity biotech analyst Corey Davis highlighted Zafgen, which went public this year. Zafgen is developing a drug called Beloranib, which has logged fast weight-loss results, in part, by changing the way fat is converted into energy. Davis has a target price of $36 on the stock; it's $18 now.

Related: Weight Watchers and the Flabby Business of Shrinking Waistlines

Early players in the race to fight obesity with drugs, like Vivus and Arena Pharmaceuticals, have been disappointing, though. Vivus has plunged more than 60 percent this year, and Arena is down nearly 30 percent. Among the reasons for the high hopes but lack of performance: Adoption has been slow, and only a few insurance companies pay for these weight-loss drugs, said Alan Carr, a senior analyst at Needham and Co. "The launches went poorly," Carr said. "And sales are slow. The companies may take another year to gain traction."

Weight-Loss Profits and Losses
Low-tech fitness, vitamin and weight-loss stocks are other avenues for investing. Sean Naughton, a senior research analyst at Piper Jaffray, likes Life Time Fitness, which is up over 8 percent this year. The company provides full-service gyms, nutritional coaches and blood work to solve weight-loss problems. "It's also opening up new gyms," Naughton said, "and revenues are growing about 7 percent this year."

As for weight-loss stocks, Kurt Frederick, an analyst at Wedbush, likesMedifast, which is up more than 19 percent this year. It sells weight-loss foods, but Frederick said the direct selling arm has struggled lately. However, new products being rolled out mean "the long-term outlook is good," he said.

One heavyweight in the space, Weight Watchers International, is struggling. And it's on a financial diet: "It's cutting costs a lot," Frederick said, "but has fewer paying customers, so growth will be difficult."

As the fortunes of the traditional weight-loss companies wane—Nestlé sold the bulk of its Jenny Craig weight-loss business last year to a private equity firm at a loss, according to analysts—Frederick sees a rise in vitamin retailers. That industry is growing faster than weight-loss companies because it also plugs into other trends, such as an aging population. "A lot of people try to lose weight on their own," he said.

Frederick has outperform ratings on both GNC Holdings and Vitamin Shoppe. GNC has had a rough year, and the stock took a big hit—it's down 32 percent. But the vitamin company, which also sells weight-loss and nutritional supplements, has a new CEO, and revenue, which was flat this year, will start growing again next year, Frederick said. Also, comparative store sales are strengthening, which the Wedbush analyst said was part of the thesis for his $46 price target on the stock.

Vitamin Shoppe, which is down more than 11 percent this year, sells hundreds of nutritional products through its 660 stores. Frederick is modeling double-digit revenue growth in 2015, and with its CEO announcing plans to retire, reports last week that the firms was considering a sale and speaking to investment bankers, the stock has been an active one. It rose 8 percent last week on the reports.

This article originally appeared in CNBC.

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