Newsletter Watch: Vanity plays
This week, we look at two small-cap plays in the health care sector, both of which could be considered “vanity plays,” as each addresses the desire of individuals to look and feel better.
The first, Obagi Medical Products Inc. (Nasdaq: OMPI), is an aesthetic selection; the company, with a market cap of $380 million, is a play on cosmetic surgery. The second, Gaiam Inc. (Nasdaq: GAIA), is more esoteric. The multi-media company, with a market cap of $526 million, focuses on fitness and health-conscious lifestyles.
"I have long favored medical and health care stocks due to their reduced sensitivity to the economic cycle and favorable demographic drivers," says growth expert Tom Bishop, editor of BI Research. “Few parts of a person's body are more important than their face. It is not surprising people will spend a considerable sum making the old mug look its best, or the young one with pimples.”
According to Bishop, Obagi's dermatology products are carried only in physicians' offices. Its products treat a range of skin conditions, including premature aging, acne, fine lines and wrinkles. Other topicals, he says, help the skin better recover from surgical and laser procedures, or optimize results for those using Botox.
“The company's niche is to focus its R&D on improving the efficacy of skin care products on the market by enhancing the penetration of these agents across the skin barrier, he said. “Obagi's workhorse product line, accounting for 60% of revenues, is its Nu-Derm System, which has been around for 18 years, and still grew 22% in Q2. This system consists of a regimen using six products that penetrate below the skin's surface to correct damage in all layers of the skin."
Obagi also launched its Obagi-C RX System in 2004, which is the only prescription based system that reduces the early effects of sun damage.
“With their superior penetration, these provide antioxidant protection to halt the damage of free radicals which can ravage the top layer of aging skin. Vitamin C based products account for about 24% of product sales,” Bishop says.
Obagi went public in December at $11 after a period, Bishop says, of investing in its own future, just as some exciting new products were introduced and earnings rebounded. He points out that the Q2 EPS of $0.18 tripled the year-ago level (despite 4 million new shares) and beat estimates by $0.02 on a 39% increase in sales to $26.1 million.
“The company is starting to fire on all cylinders; the future looks promising,” he says. “With sales expected to increase 33% this year and EPS expected to recover from $0.34 last year to a record $0.77 this year and then move on to $0.96 in 2008, OMPI is attractive for purchases up to $18.50." For disclosure purposes, Bishop says he personally owns 3,500 shares of this stock.
Our second stock is the last "pick of the week" from Kevin Kennedy, an advisor who focuses on growth and momentum.
"Fitness video king and lifestyle company Gaiam broke out of a 15-month base in August and is up 41% in 2007,” the advisor says in his Coolcat Report.
A Nielsen's VideoScan survey puts Gaiam's market share in the fitness/wellness DVD category at 48% at the end of June, while the company announced recent acquisitions—adding a trio of health-related media properties: Zaadz, LIME Media and majority ownership of Conscious Enlightenment,” Kennedy says.
Zaadz, he notes, is a healthy lifestyles social networking site with 85,000 members and 850,000 unique visitors per month. LIME also focuses on healthy lifestyles and is available on broadband TV, SIRIUS, on demand with cable providers and at lime.com.
"Lime.com has 2.2 million unique visitors per month and a library of over 1,000 hours of visual content," Kennedy says.
Conscious Enlightenment, notes Kennedy, operates the Enlightenment Card, a socially conscious credit card. This division, he adds, also publishes Conscious Choice and Whole Life magazines (with distribution in metropolitan cities from Chicago to Los Angeles). Finally, he says, Yogamates.com is a social network and video channel with DVDs and an online video streaming subscription club.
Meanwhile, he says that second-quarter revenues, which were reported in August, showed a rise of 21% to $52 million; at the same time, its earnings loss was cut to $0.01 per share. From a trading standpoint, Kennedy has a short-term target of $23 to 26.
