On October 15, 2007, I took a look at Nutrisystem (NTRI) about two weeks after a 25% drop. Running a fairly conservative analysis (in my opinion), I pegged the company as a $38 or so company. Add in a little uncertainty and a 50% margin of safety, and I said I’d consider investing under $19.50 a share.
Then, it fell off my radar.
On March 10th, it was trading in the high $12s. What looked like a $1.1 billion company was trading for less than $400 million – a 64% margin of safety. At that price, a whole hell of a lot would have to have gone wrong in Nutrisystem’s business before a $400 million price tag was justified.
I totally missed it, and missed the ensuing 54% gain in less than three months.
There’s A Lesson Here
I made the classic bonehead move. I analyzed a company, put a price tag on it, and figured out where I would be comfortable buying. Then, I forgot to look at it again to see if the markets were doing anything stupid with the price.
Just because a stock is fairly priced or overpriced doesn’t mean you should let it fall entirely off your radar. The price may be bad today, but the markets will make mistakes from time to time. You have to be prepared to pounce or you’ll miss some great opportunities.
I missed the Nutrisystem boat. Fortunately, the markets will do something stupid in the not-too-distant future and I’ll be able to jump on another boat. But just to be safe, I just added NTRI to my streamer to keep an eye on the price. I said it before – I’m not crazy about NTRI, even at $19.50 a share. But at $13 a share…
(Missing a boat usually feels worse than losing money. Did you pounce on NTRI? Let’s shake it off and get back on the horse.)
Filed under: Companies Analyzed (Generals)
Related Stocks: NTRI
I missed MA. I bought it in my play marketocracy portfolio when it was going for 45-50 but for whatever reason didn’t buy in my real brokerage account. By time I realized what I did, it figure i missed it after it passed 100 dollars. It went past 300 dollars today….oh well.
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I have a Yahoo! personal page with all kinds of modules. Weather from relevant cities, air fares, calendar, bookmarks, news feeds, favorite team scores and so on. On the left hand side I have portfolios arranged by various categories of stocks I’m tracking. Yahoo! also allows me to set up alerts. When a stock falls to a certain price, I get an email. When I miss it’s out of either greed or lack of conviction, not because of forgetting.
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It is probably a good thing you passed on this. Not a strong moat and a short history of being public. Also if your analysis said to buy under $19.50 and you bought at say $18 (around 7% lower) you would have had to sit on the stock while it fell to $12ish. That would be painfull with this type of company.
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Funny, I had Nutrisystems in a mach portfolio in a contest. Bought around $24, watched it fall and bailed at $14ish.
It was also on my watchlist in the real world and when it tanked I got cold feet.
I also liked it below $18 but didn’t pull the trigger.
Oh well, there’s plenty of better opportunities, there always will be.
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Using some “buffetism”, you did not swing at that pitch. There will be many more fat pitches coming. The beauty is you never have to look back because it doesnt make any difference now. There’s more to look forward too..
I love Buffet’s quote about investing. You only have to do a few things right as long as you avoid big mistakes!
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Hey all,
The point on NTRI was this: I don’t know that I would have bought this marginal company at $600 million ($19 and change) because I don’t know that I’m confident in saying it’s a billion dollar business. What I do know is that it’s not a $400 million business ($13 a share). I don’t know how fat it is, but I know it wasn’t $400 million slim.
Everyone will look at companies differently. In my opinion, NTRI was/is worth more than $400 million, and I should have bought it at that price and sold when I was no longer extremely comfortable saying it’s grossly mispriced.
My two cents.
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Using your spread sheet and use the assumption you made, 13%, then 11%, then 10%, I got the fair value 71.63 ( discounted at 6% ), I wonder if you use TTM data point as well. Is this annualized quaterly data ? I use 2007 as the last data point.
Personally I started planted based food, I lost 30 pounds in the past 9 months. The food is a determined factor in weight. It is a tough to find a drug to work on your metabolism, weight is controlled by metabolism. Just like it is a tough to find a drug to work on immune system ( cancer is an example ). So I am not too worry about on big pharm front.
But I am doubt if the pre-packaging food method will work at all. During the packaging process, most nutrition is gone. Also there is so many different diets. Atkin, South Beach, Zone, Abs, Dean Ornish. Some of them is direct against each other. So I didn’t see if this is an effective method. In other words the moat is not wide.
The healthy trend is for this company, about 11% middle school girls start to practice vegen diet or become vegetarian.
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The 30 year risk free rate is 4.7%. 10 y is 4.1%. This company is debt free. Having 10% risk preimum seem too high, also the cash flow estimate by Joe is reasonable conservative. I would give 5% risk premium, so the discount rate is 10% seems reasonable. Just my two cents.
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The discount rate is meant to put all opportunities on the same playing field. Don’t change your discount rate to compensate for risk — that’s the job of the margin of safety. If you use 6% (or 10% or 20%), adjust your margin of safety to account for that. At 20%, you have built in a huge return so your margin of safety would need to be smaller; at 6%, you have built in a small return so you would need to demand a larger margin of safety.
If you understood a business perfectly and the future of the business, you would need very little in the way of a margin of safety. So, the more vulnerable the business is, assuming you still want to invest in it, the larger margin of safety you’d need. If you’re driving a truck across a bridge that says it holds 10,000 pounds and you’ve got a 9,800 pound vehicle, if the bridge is 6 inches above the crevice it covers, you may feel okay, but if it’s over the Grand Canyon, you may feel you want a little larger margin of safety. – Warren Buffett
Remember: Discount rate puts all opportunities on the same playing field so that $100 dollars generated by Coca-Cola are worth the same as $100 generated by PokerTek (PTEK). The margin of safety helps protect you against excessive risk and helps enhance returns.
Make sense?
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Yes this makes pefect sense. Remember, Buffet uses 10Y or 30Y discount rate with no spread, even AAA spread. In CFA book, they will teach you using Rf beta * risk preium. The margin of safe captures beta * risk preium and also the uncertain in the cash flow estimation ( the numerator )
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I have a little due diligence to do. If it still looks attractive, I’m considering it. I’m not crazy about the company, but I might take a small position (3%-5% of the portfolio). It’s priced as though it will experience a 40% or 50% hit to sales; I don’t think it will be that bad.
Again – I have some due diligence to do, but the price is looking really good.
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Joe-
To continue my education and understanding, what kinds of due diligence will you be doing? Just looking for any news that would affect the present view (increased insider selling, new legal actions, etc.), or is there additional financial review to be done? (In addition to rerunning the numbers with the very latest plugged in, of course.)
And by the way – what’s the latest status on the book?
Thanks!
- Bill
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Joe,
Any good books or articles you’ve read which lend a helping hand in how to interpret these quarterly and yearly financial reports? I’ve got the numbers and valuation stuff somewhat understood with your help (thanks), but a lot of the other stuff goes over my head.
Thanks,
Howard
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Joe, How does this alter your valuation of the company? Since they don’t disclose terms of the purchase or any dilutive effects thereof?
thanks
Anand
NutriSystem Inc. said Wednesday it has acquired the assets of PowerChow LLC’s Nu-Kitchen for an undisclosed sum in a move that takes the provider of weight-loss meals and services into the freshly prepared meals business.
Nu-Kitchen delivers freshly prepared meals designed to promote weight management and healthy living to customers in the New York area. Customers choose from more than 200 meals containing fresh and natural ingredients that appear in rotation on the company’s weekly menus.
Horsham, Pa.-based NutriSystem (NASDAQ:NTRI) plans initially to extend NuKitchen’s local daily delivery service to the northeastern United States and eventually to roll it out nationwide. NutriSystem will preserve the Nu-Kitchen brand and product offerings as a complement to the shelf-stable selections in its NutriSystem Advanced program.
Nu-Kitchen co-founders Mark Newhouse and Bryan Janeczko will manage the Nu-Kitchen brand and oversee the expansion of its local daily delivery service.
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Howard: Practice + Google makes perfect. Send me an email explaining some of the things that are going over your head and I’ll see if I can help.
AJ: Why the company is not disclosing it is beyond me. I was on today’s conference call and the CFO made it sound like a small deal in terms of actual dollars. My hope is that management is doing a good job of reinvesting my owner earnings. Only time will tell; so, I barely gave that news release a thought.
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Hi Joe – NTRI is another stock I’ve been watching closely, per your excellent analysis. It’s trading down ($11 today) based largely on the drop in revenue and management’s lack of visibility with consumer spending. Do you still own this stock, and more importantly, do you feel the company’s intrinsic value has changed due to the rapidly deteriorating economy? It seems that overpriced mail order meals would be the first thing cut from a household’s budget in times like these.
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I think we’ve all had our missed opportunities. I know I have.
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