To be savvy investors, we need to learn how to connect the dots. There are so many investment clues to discover all around us if we spend time observing. One of the dots I think I've connected is that old school health and fitness stocks are an intriguing laggard reopening trade. I'm not talking Peloton, but gyms.
We are clearly in a bull market. You may chase momentum if you want. I've certainly kept buying many of the tech growth names on the way up in my portfolio. However, the contrarian in me also likes to buy unloved stocks that eventually could come around.
Since the beginning of 2021, I've been steadily diversifying into banks and old economy stocks after tech did so well in 2020. But I'm still too overweight tech. Therefore, I'm still looking for new names.
As a disclaimer, this post is not investment advice. Please do your own due diligence and invest at your own risk.
I am writing out my thoughts on why the health and fitness sector looks like a buy today. I always go through a similar type of analysis before I make any investment decision. It's the financial analyst in me from my days working on Wall Street. I find the exercise fun and also helpful for uncovering blindspots.
Why I Began Looking For Health And Fitness Stocks To Buy
My catalyst for looking at health and fitness stocks is because my wife and I went out as a couple to a social gathering for the first time in a year. We met up with new preschool parents for a casual drink outdoors.
During our outing, I realized I was self-conscious about my hair because I hadn't gone to a professional barber in 18 months. Every three weeks, I've been cutting my own hair with my $24 clippers. Frugality for the win! As a result, I wore a baseball cap.
While having drinks with the preschool parents, two mothers mentioned they had gained a lot of weight since the pandemic began. As I didn't know what they looked like before, I said nothing and just smiled. What I should have said was, “You look just fine the way you are,” but I was out of social practice.
After seeing how nicely the others were dressed, I decided to buy some new polo shirts and a sweater from Lacoste. I was in the Union Square shopping area, so I figured why not buy some new clothes to replace my 10-year-old ratty t-shirts. However, when I tried on a classic fit size Medium, the shirt was tight. Therefore, I went with a size Large that snugged my guns.
Immediately, I thought, If I'm going to spend money buying new clothes, I had better stay in shape so I can wear them forever. Further, when it comes to looking good, I think 70% is in how fit you are and the remaining 30% is what you wear.
It was when I was at the cash register that I thought about looking for health and fitness stocks to buy. After all, one of my consumption rules is to spend money only off investment gains. It's like an automatic reaction whenever I want to buy something I don't need.
Why Health And Fitness Stocks Look So Attractive
1) Big Time Weight Gain
According to an American Psychological Association survey, 42% of respondents said they had experienced weight gain since the pandemic started. While 18% said they experienced undesired weight loss. Wish I had that problem!
Among those who reported undesired weight gain, the average gain was 29 pounds. Roughly 50% of those who reported undesired weight gain said they had gained more than 15 pounds. 10% said they had gained more than 50 pounds.
According to the survey, women were more likely than men to report undesired weight gain (45% vs. 39%). However, men who experienced undesired weight gain reported gaining more weight than women did (37 pounds on average, vs. 22 pounds).
According to the CDC, in 2010, the average weight of a man in America was 197 pounds, while the average weight of a woman in America was 166 pounds. According to a 2020 Gallup poll, the average weight for a man was 200 pounds and the average weight for a woman was 162 pounds.
Either way you cut it, Americans should probably slim down a little given average heights aren't much taller from 30 years ago.
Gaining 5-10 pounds in one year is par for the course as we get older. I've gained about five pounds over the past two years. However, gaining 29 pounds in one year seems excessive. Therefore, there should be a strong desire to lose weight in the coming year, especially as many more people return to work.
2) Good Timing
What are the two most popular new year's resolutions every year since the beginning of modern history? Losing weight and increasing wealth. Given we've been in a raging bull market, the increasing wealth goal is handling itself. Staying in shape, however, has not for millions of people.
The desire to lose weight generally starts sometime towards the end of the year and is strongest through the first quarter. Then, thanks to human nature, people start slacking off in 2Q. By the start of 3Q, we're back to where we started. Then, the cycle repeats.
1H2022 should go down as one of the strongest years in history for the public to want to lose weight. Heck, maybe I should temporarily turn Financial Samurai into a health and fitness site so we can all temporarily get fitter! Better yet, maybe I should just buy a health and fitness website before the new year.
The social pressure to get back to pre-pandemic weight and look better in front of your peers will only boost demand for gym memberships, equipment, and supplements. If I can feel the peer pressure to get in better shape as someone who goes out once in a blue moon, I'm sure millions of others who see coworkers every day will as well.
Therefore, you want to buy health and fitness stocks before the health and fitness hype happens in 1Q2022. You also want to be long health and fitness stocks before these companies report strong 1Q and 2Q results. 1H2022 earnings should compare favorably to 1H2021 since 1H2021 was still a highly uncertain time.
3) Many Reopening Trades Have Already Rebounded
Although not entirely back to pre-pandemic highs, most airlines and hotel stocks have rebounded greatly from their 2020 lows. See names such as Hilton Worldwide (HLT), American Airlines (AAL), Airbnb (ABNB 8X higher than when they raised capital from Silver Lake in 2020).
Meanwhile, demand for private hospitality real estate is also very strong. I've observed a number of hotel deals get filled up very quickly in recent months.
4) Anecdotal Evidence At My Club Is Strong
In 2020, my tennis club was largely empty due to the pandemic. Even though tennis is one of the safest pandemic sports to play, I could always get a court, even after normal working hours.
Starting around September 2021, I noticed I sometimes had to wait for a court. It didn't matter whether I was coming at 11 am or 2 pm on a weekday, the courts were often busy. Forget about walking onto a court at 5 pm. In addition, the indoor dining area is frequently packed with elders in their 70s and 80s as the fear of COVID dissipates.
Given the busyness of the club, the club even resorted to hiring valets for our usually empty 50-car parking lot! Valets during the weekdays? Incredible.
I see the demand going up for health clubs with my own eyes. And from a waiting list perspective to join my club, it has gone from just several months in 2020 to two years.
People want to mingle, exercise, and belong to something again.
Life Time Group Holdings (LTH)
After formulating my thesis on health and fitness stocks, I went looking for something to buy. Names such as F45 Training (FXLV, $1.2B market cap), Xponential Fitness (XPOF, $756M market cap), The Beachbody (BODY, $1.6B market cap), and Planet Fitness (PLNT, $6.75B market cap) popped up.
However, what I found most interesting was a company called Life Time Group Holdings (LTH), which had been a publicly traded company before it went private in 2015 for about $4 billion.
The health club, which was founded in 1992, had about 1.4 million members as of July 31, and more than 150 centers located across the United States and Canada. These centers are massive 120,000- 150,000 square feet wellness centers. There's also an additional 60,000-70,000 square feet of outdoor space.
The CEO, Akradi, says his centers “deliver a Ritz Carlton or Four Season experience.” Sounds good to me. I'd like that.
Here are some of the amenities in its wellness centers:
- Top-of-the-line fitness equipment
- Spacious locker rooms
- Group fitness studios
- Indoor and outdoor pools
- Indoor and outdoor tennis courts
- Basketball courts
- Childcare and Kids Academy learning spaces (so important for parents!)
Many gyms were forced to shutter starting in March 2020 due to Covid-19 pandemic restrictions. Life Time was no exception. LTH, which did not collect any fees from members while its centers were closed, reported a loss of $360 million on revenue of $948 million in 2020. In 2019, it reported a profit of $30 million on revenue of $1.9 billion.
The numbers aren't great, however, revenue in the first half of 2021 was $562.5 million, an increase of 17.9 percent year over year. But the company still lost $229 million during this time period. The bet is whether the company can minimize its losses and get back to profitability before its cash runs out.
By the way things are going, hitting $1.9 billion in revenue again in 2024 looks highly feasible. After being forced to streamline operations in 2020 and 2021, margins could expand in 2022 as well.
Buying Below IPO And Privatization Price
Life Time Group recently went public again at a price of $18 a share. The company raised about $702 million to help pay down its ~$2.4 billion in debt and run operations.
At the time of this article, the company has a market capitalization of about $3.25 billion, or about 19% below where it went private in 2015 and 6% below its IPO price. In other words, if I buy now, I get to invest below where private equity titan, TPG invested. That's hard to do.
Although having $2.4 billion in debt is a lot, it's not so much now that LTH has $702 million in cash from the IPO plus the ~$100 million in cash it already had on its balance sheet. Just imagine having a $2.4 million mortgage and $802,000 in cash or a $240,000 mortgage and $82,000 in cash. Totally manageable, especially if cash flow / rent is improving.
Personally, I'm willing to buy LTH in the $16.50-$17 range. I believe people will come rushing back to its wellness centers in 2022. The company trades at almost half the EV of Planet Fitness, the “gorilla” in the space which has performed decently. With 120,000 – 150,000 square feet of indoor space, these wellness centers feel much safer than getting on a plane packed with people.
$800+ million in cash also buys LTH the time to wait for a recovery and improve operations. But of course, the company could falter if we see another big COVID surge that keeps people away. If that's the case, our healthcare system might collapse if we pack on another average 29 pounds in 2022.
More than anything, people want to socialize and get fit again. It doesn't matter how much money we have if we don't have our health.
One Final Dot To Connect
Yelp recently published its Q3 2021 Economic Average report, which investors should read. The below passage stands out:
In Q3 2021, consumer interest on Yelp increased above Q3 2020 levels for bowling (up 116%), waterparks (up 115%), Axe throwing (up 107%), stadium arenas (up 96%), indoor play centers (up 204%), lasertag (up 77%), and amusement parks (up 70%). This increase illustrates less hesitancy among consumers to participate in activities where the ability to social distance is limited or not possible.
After a year of home and outdoor workouts growing in popularity, gym and fitness classes are back on the rise. In Q3 2021, pilates (up 54%), pole dancing classes (up 56%), aerial fitness (up 74%), yoga (up 41%), barre classes (up 42%), and saunas (up 55%) all surpassed Q3 2020 consumer interest levels.
Ah hah! So the 70+-year-olds dining indoors at my club are a good indicator after all.
Management Can't Wait To Tell Us Something Good
Calendar Q3 ended on September 30. Therefore, health and fitness companies who have yet to report their calendar Q3 numbers will likely report a strong rebound in earnings. In other words, the earnings inflection point for health and fitness companies looks to be in 2H2021. And earnings should only get stronger in 1H2022.
Given LTH just went public on Oct 7, 2021, it should be in a quiet period until mid-November 2021. A quiet period is when management cannot speak to the public about the business. The rule avoids giving analysts, journalists, certain registered investment advisors, private investors, and portfolio managers an unfair advantage.
But as someone who always tries to connect the dots and predict the future to build wealth, it sure seems like management will have some good things to say once its quiet period is over.
Update: The 3Q2021 results are out here and it looks like everything is trending in the right direction. Sell-side analysts have also initiated coverage:
- Guggenheim (Buy, TP $21)
- Deutsche Bank (Buy, TP $21)
- RBC Capital Markets (Outperform, $23 PT)
- Goldman (Neutral, TP $23)
- Morgan Stanley (Equal-weight, TP $21)
- Wells Fargo (Hold, TP $19)
Further, Peloton reported terrible results with its inventory way up as more people are heading back to gyms to workout. The trend for gym stocks like Planet Fitness and Life Time Group is their friend. I'd love to hear feedback from you on the negatives of investing in health and fitness stocks and LTH in particular. The more negative the feedback the better. Do you have any other health and fitness stock ideas?
Again, this post is not investment advice. And in case you're wondering, I have no affiliation with LTH. If you are new to Financial Samurai, you can read the below posts to get a better idea of how I think and invest. I almost always put real money to work, otherwise, everything is just pointless jibber jabber.
Invest In Private Growth Companies
One of the most interesting funds I'm allocating new capital toward is the Innovation Fund. The Innovation fund invests in:
- Artificial Intelligence & Machine Learning
- Modern Data Infrastructure
- Development Operations (DevOps)
- Financial Technology (FinTech)
- Real Estate & Property Technology (PropTech)
Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!
The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. In addition, you can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.
Liquid Courage: The Biggest Benefit Of Cash (why cash is not trash and mentioned Chinese internet stocks)
How To Predict A Stock Market Bottom Like Nostradamus (thought process on buying stocks aggressively in March 2020)
The COVID Variant Investment Thesis (thought process if there is another variant surge)
Big Risk-Averse With Health, Risk-Loving With Money (make sure your health is your top priority)
The Ultimate Financial Security: A Strong Mind (a recap of investing in health and fitness stocks)