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Do As I Say, Not As I Do

By Joe Ponzio on May 29, 2008  |  30 comments

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.

Bonehead miss on NTRI

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.)

Written by Joe Ponzio on May 29, 2008

Joe Ponzio is the managing partner of the Ponzio Investors Funds and owner of Ponzio Capital Inc, a registered investment advisory and deep value portfolio management firm. The author of F Wall Street (the book and the website), his articles have appeared in hundreds of financial media, including Financial Planning Magazine, CNBC.com, Yahoo! Finance, and Reuters. He has appeared numerous times nationally on both radio and television, and has presented at universities and seminars across the United States.

Read more articles like this online at www.fwallstreet.com.
To learn more about Joe's portfolio management services, visit www.ponziocapital.com.
The Discussion
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kfh' gravatar

kfh
May 29th, 2008
27 comments

I think we've all had our missed opportunities. I know I have.

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Tim J' gravatar

Tim J
May 29th, 2008
4 comments

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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Jason' gravatar

Jason
May 29th, 2008

That happens to everyone at some point. Don't look back. Too many opportunities to look forward to.

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Rene' gravatar

Rene
May 29th, 2008
80 comments

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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Dan' gravatar

Dan
May 30th, 2008
1 comment

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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Jay' gravatar

Jay
May 30th, 2008

Dan, the temporary decline wouldn't have bothered me if I had conviction in analysis. Besides, the stock price was this volatile over just three months. Thats no time for a value investor.

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John' gravatar

John
May 30th, 2008

Sucks when Mr. Market knocks on the door with a sweet deal and no one answers. He was for for 12 and in three months wants to pay 20. This is the best game in the world!

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AlexG' gravatar

AlexG
May 30th, 2008
5 comments

its ok Jay,
Mr. Market will offer many opportunities. Like Buffett says, the beauty of the stock market is its a no strike game.


-http://www.contrarianvalu...

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Paul' gravatar

Paul
May 30th, 2008
3 comments

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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Dave' gravatar

Dave
May 30th, 2008
14 comments

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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BlahBlah' gravatar

BlahBlah
May 31st, 2008

Coulda, woulda, shoulda - NTRI is far from what I consider a company with a 'wide moat'. I wouldn't have swung at it either.

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edward' gravatar

edward
Jun 2nd, 2008

Agree Blah, and based on my estimation of normalized earnings they were an easy one to miss.

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Joe Ponzio
Jun 2nd, 2008

Joe on twitter
Ponzio Capital

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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jay' gravatar

jay
Jun 3rd, 2008

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.

http://www.redorbit.com/n...





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Adam' gravatar

Adam
Jun 6th, 2008

In my opinion your 6% discount rate is far too small. Correct me if I'm wrong, but it looks like Joe used a 15% discount rate and an assumed cash flow growth rate of 9-10% for the first 10 years and 5% for the second ten.

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jay' gravatar

jay
Jun 10th, 2008

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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Joe Ponzio
Jun 11th, 2008

Joe on twitter
Ponzio Capital

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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jay' gravatar

jay
Jun 13th, 2008

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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Howard' gravatar

Howard
Jun 30th, 2008
18 comments

Don't miss out this time, Joe. NTRI is touching the 13's again. Now you don't have to feel so bad.

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AJ' gravatar

AJ
Jun 30th, 2008
3 comments

Wondering if Joe still feels the same about NTRI in this market as well now that is in the 13's again?

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Joe Ponzio
Jul 1st, 2008

Joe on twitter
Ponzio Capital

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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Bill' gravatar

Bill
Jul 1st, 2008
4 comments

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 Ponzio
Jul 9th, 2008

Joe on twitter
Ponzio Capital

Bill,

I had to take a look at the most recent quarterly report and then see if any insiders are buying or dumping. Then, I revisited my valuation to double check my confidence level.

Even my (almost) worst case scenario evaluation tells me this is cheap.

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Howard' gravatar

Howard
Jul 9th, 2008
18 comments

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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AJ' gravatar

AJ
Jul 9th, 2008
3 comments

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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Joe Ponzio
Jul 23rd, 2008

Joe on twitter
Ponzio Capital

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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Daniel Davy' gravatar

Daniel Davy
Feb 14th, 2009
1 comment

I bought NTRI around June 10 of last year for 18.53, cost. And then bought it again on June 27 or 28 net at 15.58, and have been holding the total position since then at a net cost of 17.45. So my thinking seems (at least here!) to be consistent with yours....

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Dan' gravatar

Dan
Feb 23rd, 2009
36 comments

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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Joe Ponzio
Feb 25th, 2009

Joe on twitter
Ponzio Capital

I still own it from the $10s, though I think that the value has certainly fallen somewhat. I'll consider selling it around $16-$18, give or take.

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Graham Jervis' gravatar

Graham Jervis
Jun 4th, 2009
6 comments

Hi Joe,

based on the model, the share value is around 20.84 now, with a 25% MOS, the buy price is 15.63, at the moment of this writing the share price is 15.63. but as you said, you would tag a 50% MOS on this, then this would make the buy price 10.42.

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