Making Money Without the Speculation Rush
Research Director, Mad Money
From: James Cramer
Sent: Tuesday, February 21, 2012 4:49 PM
To: Nicole Urken
Herbalife – monster quarter
From: Nicole Urken
Sent: Wednesday, February 22, 2012 1:04 PM
To: James Cramer
Subject: Re: HLF
Comparisons vs Avon attached. HLF the best positioned of the direct-selling bunch
In Thursday’s market top, Cramer discussed the value of speculation as an element of diversification versus the antithesis of it. As long as you manage your risk (a riskier bent is not appropriate for everyone, of course), having some exposure to speculative names and trades can keep you “in the game,” after all.
And the Vivuswin this week, if you were in the name, is case in point:
Vivus, the speculative name with an obesity drug called Qnexa, jumped from $10.56 on Wednesday close to a high of $21.44 Thursday after an FDA advisory panel backed approval of its drug with a 20-2 vote. The nod came as a surprise to many given concerns, including: (1) The more risk-averse nature of the current FDA, (2) Negative association of anti-obesity drugs like Wyeth’s fen-phen, which was pulled from the market after reports of association with heart disease and (3) Lack of success in the Vivus first advisory panel last year, where experts voted 10-6 not to recommend Qnexa’s approval. This was on top of the FDA issuing complete response letters to VVUS competitors Orexigen and Arena and pulled Abbot’s Meridia from the market.
While risks still remain with the Qnexa, with the obesity epidemic a continuing and growing problem, the benefits of the drug could not be ignored by the panel. Last month on "Mad Money," we highlighted key drugs in development from the major pharma companies — like Merck , Pfizer , Bristol Myers, Johnson & Johnson, Biogen , and Sanofi-Aventis — that offer opportunity based on treatments for diseases like multiple sclerosis, Alzheimer’s, cardiovascular disease, Hepatitis C and beyond. However, the obesity market remains one of the largest untapped pharma markets in the world. In the United States, the cost to health care is estimated to be about $150 billion per year, according to the World Health Organization. And Vivus is reaping the benefits as a spec name.
This is all well and good. But it is important to remember: it doesn’t take speculation to reap huge gains. A wide misconception among many individual investors is that the “smart money” is in all the well-known stocks already and that, thus, there is limited upside unless you go after the high-risk / high-reward opportunities. This is misplaced, however. Instead, continuing to identify long-term secular themes and stocks that are well positioned to benefit from these trends can reap huge gains while avoiding the binary outcomes of many names like Vivus which come with hefty downside risk.
Let’s take the source Vivus’ market opportunity: the obesity epidemic. On "Mad Money," we have identified a number of names that are well-levered to the health trend, but one that stands apart take Herbalife , whose CEO Michael Johnson came on "Mad Money" this Wednesday to talk about the company’s strong quarter and strong go-forward prospects. Here is a direct selling name — a la Tupperware and Avon — which has come up to near $70/share from its low of $6 and change in March 2009. That’s a gain of nearly 1,000 percent. In the last year alone, the stock is up 73 percent. Not too shabby.
HLF has been such a winner because it stands at the intersection of SEVERAL important global megatrends, including (1) obesity, (2) an aging population, (3) under/un-employment and need for additional income via its direct selling model, and (4) emerging market growth, particularly given its scalable model in regions with less brick & mortar competition. As its CEO has said, the company is uniquely positioned at the intersection of “health and wealth.”
With its products ranging from protein shakes to energy drinks, vitamins and nutritional supplements, Herbalife is front and center in the “health play” arena and one that also caters to the increasingly aging population aiming to look and feel younger for longer. In addition, the company’s direct-selling channel is built on distributors that sell HLF products — increasingly through nutrition clubs. This provides an outlet for additional income opportunity for many unemployed or under-employed workers. Of course, HLF’s large and growing emerging market business benefits from the rising middle class in these regions along with less brick & mortar competition present in more developed regions.
The bottom line: The Vivus surge this week may have gotten your heart rating (particularly if you owned it!), but the take-away should not be to shell all your money into speculative bets. Established names like Herbalife could provide huge upside as well. HLF may not give you the VVUS “rush,” but it sure has made you a lot of money. And making money is anything but boring.