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3 body-beautiful stocks for bountiful returns
As baby boomers grow older and wider, theyre spending billions to maintain their looks and waistlines. Here are three stocks in good shape to profit from the quest to remain youthful.
By Michael Brush
As you push away from another Thanksgiving table this week -- reminding yourself its time to drop a few pounds and spruce up your look -- take comfort in at least one thought.
You arent alone.
An astonishing one-third of American adults are now overweight. And during the next decade, about 1.5 million people a year will enter the 45-64 age range -- that phase of life when youthful looks inevitably surrender to time.
But theres good news, as well, at least for investors. The accelerating search to slow the effects of time has created huge new markets -- and lots of fast-growing companies to serve them. The following companies are among those that should prosper in the coming year as the demographic tables take more and more Americans into middle age and beyond:
- Allergan (AGN, news, msgs), which offers the popular Botox, used to reduce wrinkles on the face.
- Inamed (IMDC, news, msgs), which makes medical devices used in an increasingly popular type of stomach surgery that controls appetite. Soon, this company also will be offering silicone breast implants. Not seen on the market since 1992, these implants are thought to be far superior to saline implants available now.
- Nautilus Group (NLS, news, msgs), which caters to those who still believe in losing weight the old fashioned way, with exercise machines. This potentially profitable value play is in the early stages of a turnaround that could get the company back into shape.
Heres a closer look at these three body-beautiful stocks.
Allergan
Investors who really want to benefit from the growing popularity of Botox have to own shares of Allergan. To see why Allergan has such a lock on the Botox market, you need to understand the basics of this drug.
Unlike most pharmaceuticals, which are based on chemicals, Botox is a biological substance derived from the bacterium Clostridium botulinum. Yes thats the bacterium that can produce botulism. Botox itself is actually botulinum toxin A, one of seven neurotoxins produced by the bacterium.
Because its tricky to grow, you cant patent the process. But thats the good news. It means Irvine, Calif.-based Allergan isnt forced to share its secrets with potential competitors -- in the form of a patent. Companies that make pharmaceuticals based on new chemicals protect them with patents, but once the patents expire, generic drug makers can bring the same product to market and bring down profit margins.
In the case of Botox, competitors have to try to figure out how to make it on their own, which is challenging. And each attempt must go through a lengthy FDA approval process. As a biological, it is hard to produce in good quality and large quantities," says Christopher Bonavico, co-manager of the Transamerica Premier Growth Opportunity fund (TPSCX) and Transamerica Premier Focus fund (TPAGX). Its better than a patent, he says. (Allergan represents about 4.7% of the Transamerica funds holdings, according to Morningstar.)
Originally approved in 1989 to treat uncontrollable blinking, Botox disables muscles by blocking communications between nerves and muscles. So, as a wrinkle cure, Botox keeps patients from wrinkling up the parts of the face where it is injected.
Botox use is taking off partly because its so lucrative for doctors. They charge anywhere from $700 to $1,000 for a treatment, which takes about 15 minutes, and they use less than $100 worth of the product.
But doctors are finding out that the muscle-paralyzing effects of Botox make it a good cure for other ailments, too, ranging from common problems like migraine headaches and back pain to afflictions like excessive sweating and urinary incontinence. The product story is good and getting better, says Bonavico.
The beauty of it all for Allergan shareholders is that much of the spending on the plants and labs used to make Botox is in the past. This means most of the revenue from use in each additional medical application -- or indication, in drug-industry lingo -- falls right down to the bottom line. The whole point is you dont need that many people on each one of these new indications for this to be a big stock, Bonavico says.
Inamed
Inamed is a virtual one-stop shop for people who turn to the medical field to reverse the clock. First, the Santa Barbara, Calif. company sells medical devices used in increasingly popular stomach surgeries to reduce appetite. Sales of these devices (about 20% of the company's total revenue) jumped 50% last quarter, compared to the year before.
By far the biggest seller in this category is a device called Lap-Band. Its an inflatable ring put around the stomach to control the amount of food flowing into the digestive tract. Unlike more-drastic stomach surgery, this option requires smaller incisions and shorter hospital stays. Analysts expect sales growth to continue near 20% for the next two years as more insurers cover the procedure and more doctors get trained in how to insert it.
Meanwhile, growth in Inamed sales of breast implants stands at about 12% a year. But sales could really take off next year when silicone gel breast implants, mostly unavailable in the United States since 1992, make a comeback. The Food and Drug Administration (FDA) blocked the use of silicone breast implants more than 10 years ago because of health concerns. Since then, several studies have found no evidence that these implants cause any major diseases, according to the Institute of Medicine.
That makes the FDA likely to approve Inameds silicone implants by next summer. Even though theyre more expensive, silicone implants will catch on fast because they have a more natural look and feel than the saline implants now in use, plastic surgeons say. Surgeons have told Lazard Freres analyst Alexander Arrow they expect a 70%-80% conversion almost immediately. USBancorp Piper Jaffrays Thomas Gunderson guesses there will be a 55% conversion within 12 months.
Sell-side equity analysts believe that silicone implants ultimately could add about $20 per share to Inamed stock. That suggests a stock price advance to at least the mid-$90s, from recent levels of around $80.
Inamed shares got hit hard in early November when the head of an FDA advisory panel that voted 9-6 in favor of Inameds silicone implants wrote a sharply-worded letter to the FDA opposing their use. But the letter may have little impact, since the panel already has voted. I think it is a non-issue, says Tim Ghriskey of Ghriskey Capital Partners in Greenwich, Conn., which holds Inamed shares.
Finally, Inamed has a stable of collagen-based drugs that are injected under the skin to add puffiness and reduce wrinkles. Growth in this segment has taken off since last March when the FDA approved new types of collagen, called CosmoDerm and CosmoPlast, which are derived from humans. Unlike bovine collagen, these new products dont require sensitivity tests prior to use.
Inamed also just got approval last week of another anti-wrinkle treatment called Hylaform.
Nautilus
This former mighty momentum stock -- which had doubled every six months and reached $45 a share last May -- now looks more like a 98-pound weakling. It's slouching along under $15. The problem: Sales of its exercise equipment turned flabby, and the momentum crowd fled the stock like teen-age girls running to ogle the new lifeguard.
But Nautilus still has a powerful brand name, well-known exercise machines like Bowflex and Stairmaster, and a muscular balance sheet, with $2 per share in cash.
Whats more, a new chief executive, Gregg Hammann, has put the Vancouver, Wash., company on a fresh fitness regime. Hes trimming costs. And hes shifting distribution away from direct sales channels (infomercials and the Internet), where competitors like Logan, Utah-based ICON Health and Fitness have been overpowering Bowflex with lower-priced offerings. Indeed, Nautilus has patent and trademark challenges against ICON because ICON's CrossBow exercise machine is similar to Bowflex. (ICON also makes the NordicTrack brand of fitness products.)
But any victories on that front are a long way off. So its a good thing Hammanns decision to shift distribution to sports retail chains like Sports Authority (TSA, news, msgs) has been a success so far. That should help Nautilus negotiate more retail floor space for its other exercise products.
These are all reasons the stock is a favorite of John Buckingham, the editor of the Prudent Speculator newsletter and manager of the Al Frank fund (VALUX). His newsletter portfolios are up 74% so far this year, and the fund is up 67%. Buckingham thinks the stock looks attractive below $13.85, where it pays a 3% yield and has a price-to-earnings ratio of just 9 and a price-to-sales ratio below 1.
Just dont look for assurance from sell-side analysts on Nautilus. Many of them hate the stock. But thats what you want to see in a good value play. Once signs emerge that the Nautilus turnaround is on track, theyll upgrade the shares and attract new buyers. Nautilus is a big name in the industry, and, over time, it will be a growth story again, says Buckingham. Meanwhile, you get paid a 3% yield while you wait.
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