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Growth Industry: How Investors Can Profit From Obesity Epidemic


America’s obesity epidemic is expensive: an estimated $147 billion a year, to deal with everything from cholesterol-clogged arteries to juvenile diabetes. And many businesses have benefited from those ballooning waistlines, such as sugary sodamakers and the evil genius behind KFC’s new Double Down sandwich.

AP

But to turn this tide, there are also a growing number of investing opportunities. For companies aiming to stem the tide of obesity—whether upstart biotechs, organic grocers, fitness chains, or weight-loss specialists—there’s no shortage of potential clients. Americans are getting larger by the day, and many are in desperate need of anyone who can help get their girth under control.

“Compared to just 50 years ago, obesity has spread to every state in the country and become an enormous problem absolutely everywhere,” says Alan Carr, a biotech analyst with New York City-based investment bank Needham & Co. “It’s stunning to see how fast it’s happened, and how severe it is. For the right company, there are lots of possibilities here.”

The promise of a blockbuster drug, to trim you down without causing nasty safety issues or side effects, is the Holy Grail of the pharmaceutical industry. Carr singles out three firms that have potential weight-loss fixes in late-stage development: Contrave, developed by Orexigen, Lorcaserin by Arena , and Qnexa by Vivus . He singles out Vivus as the firm with the most potential, with its drug bringing about an average 9 percent weight loss in trials so far.

One Nation Overweight - More on America #1 Health Problem
One Nation Overweight - More on America #1 Health Problem

There are a handful of weight-loss drugs already on the market, Carr notes. But side effects and safety concerns have hindered them from becoming breakout successes. Meridia from Abbott is facing questions about the prevalence of heart attacks and strokes, and in fact has been banned in Europe, while over-the-counter Alli by GlaxoSmithKline can lead to some unpleasant gastrointestinal side effects.

There is, of course, another way to treat obesity that doesn’t involve a magic bullet: old-fashioned diet and exercise. Not as sexy a solution for the nation’s couch potatoes, perhaps, but undoubtedly more effective. “There’s no drug panacea, diets don’t work over the long-term, and surgical procedures are still extreme,” says Dr. David Kessler, former commissioner of the Food and Drug Administration and author of The End of Overeating. “You have to change how people perceive food, and that’s why nutritional coaching actually works.”

Enter WeightWatchers International, an anti-obesity warrior that has received five-star status from Chicago-based equity research firm Morningstar. “Obesity is only getting worse, and companies like WeightWatchers stand to benefit from this trend,” says Morningstar senior quantitative analyst Warren Miller. With meeting attendance rising and growing expansion into Europe, he sees WeightWatchers as a dominant player in the race to rein in our collective appetites.

Miller singles out the company as an attractive value pick, now trading around $27. He pegs fair value at $41, driven by a new online offering that has grown like “gangbusters” even through the worst of the recent recession. “The obesity trend is only getting worse, and we see no drugs in the pipeline that will knock WeightWatchers off its pedestal anytime soon,” Miller says.

Digital Vision | Getty Images

For another, $18-billion-a-year opportunity in the anti-obesity space, check out the growing network of health clubs around the country. The niche has been expanding along with our stomachs, at a healthy 4% annual clip for the last 30 years. While some chains like Curves International are privately held, two publicly-traded names are Town Sports International Holdings and Life Time Fitness(LTM).

But caveat emptor: It’s a business of slim margins, says Morningstar analyst R.J. Hottovy, so make sure you’re investing in a club with dominant local positions. He prefers Life Time Fitness for its commanding presence in the Midwest, lending it both purchasing power and advertising clout.

Clubs that spread themselves too thin can face serious financial hurdles, as Bally Total Fitness did in twice seeking bankruptcy protection.

For the simplest investing tip of all, consider the food we’re shoveling into our bodies. Since processed food was what brought us to this obese point - gut-busting concoctions layered with fat, sugar and salt - look to purveyors of the opposite for investing ideas.

“Over the next 20 years there are going to be more and more opportunities for providers of real, fresh, local food,” says Dr. Kessler, with Whole Foods Market(WFMI) being a leading example of a health-minded grocer. “It’s moving into the mainstream, and getting to the point where it won’t be viewed as just for the elites.”

Symbol
Price
 
Change
%Change
XTG
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9421.T
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CLUB
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LTM
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OREX
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VVUS
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WTW
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While investors have to pick their spots at the moment, don’t be surprised if the anti-obesity space gets its own specialized fund in coming years. With 200 million Americans now categorized as overweight (a full two-thirds of all adults), combining a variety of fat-busting strategies into a single trading option could have intriguing potential.

“An ETF like that could certainly be a possibility,” says Morningstar’s Miller. “This is a huge, secular trend that’s positive for any company trying to help Americans manage their weight.”

'One Nation Overweight'