Weight Loss Website Could Fatten Profits, Plus Two Stocks Where Insiders are Buying the Blow Up

By Michael Brush
June 29, 2006

Unlike many of the obese people that eDiets.com (DIET) tries to help, the company’s shares have lost a lot of heft lately.

Since earlier this year, the stock of this thinly traded dieting website founded in the early days of the dot com era has been nearly sliced in half – falling to $4.70 from $8.60.

It’s easy to see why.

• The company is in the midst of management turmoil with one CEO departing – apparently because of a disagreement with the board on a strategy shift -- and another one not yet in place.


• It recently pushed back the launch of an “infomercial” that was supposed to help save the day by spreading the word about eDiet.com’s move into delivery of healthy food to dieters.


• The website makes money by selling subscriptions to get information like meal and fitness plans and dieting tips which presumably you can find elsewhere, and subscriber churn is high since people tend to stay on diets only briefly.

Insiders still buying


Given these kinds of negatives, why would insiders buy? Because they belong to a hedge fund that is taking a huge position in the company and putting a director on the board to oversee changes that should make the stock go up.

The hedge fund is Prides Capital and the board member is Kevin Richardson.

Here is the plan.

• 
  That infomercial which was supposed to hit the airwaves recently will most likely be pushed back to late summer. Managers apparently didn’t think it got the message across that eDiet.com’s delivered meals are fresher and better than those of competitors. If shareholders who buy now ever make any money out of the stock, it’ll be because largely this meal delivery system takes off.

Canaccord Adams analyst Scott Van Winkle estimates that if eDiets.com penetrates just 5% of its subscriber base, or 10,000 customers, it would bring in $91 million a year. That would nearly triple current revenue. The company’s delivered meals go for around $20 to $35 a day. Van Winkle thinks the meal delivery service will generate $7 million in revenue this year and $13 million in 2007.

The company has a database of five million email subscribers, and between one million and two million visitors go to the website each month. The company should be able to leverage this user base through activities like advertising, licensing and e-commerce.

The company recently purchased a profitable business called Nutrio, which provides online wellness plans to corporations.

There’s no shortage of potential customers. About two-thirds of Americans are overweight and 30% of U.S. adults – more than 60 million people -- are obese. About a third of the people in the U.S., or 71 million people, are on diets.
“The company is dramatically expanding its ability to monetize its subscriber base, in our opinion, which should ultimately drive higher revenue and earnings,” says Van Winkle. He has a $7.50 price target on the stock. It recently sold for $4.70.

Buying the blow up

Two companies recently saw significant insider buying after their shares blew up because of bad news.

• Shares of Jos. A Bank Clothiers (JOSB) have fallen nearly 40% in June due to lowered earnings expectations and a sense among some investors that the company took too long to reveal a negative shift in the mix of product sales that began playing out back in February or March. Insiders recently bought around $150,000 worth of stock for about $24. Ryan Beck & Co. analyst Margaret Whitfield recently upped her rating on the stock. She has a price target of $35.



• Shares of Actuant (ATU), which makes tools components and motion control systems used in industry, also broke down in June, slipping to $48 from nearly $67 in May. The break down in June came after Actuant released earnings. “Management, in its attempt for transparency, seemed to focus on everything that was negative versus the many positive aspects of its business in our view,” says Wachovia Capital Markets analyst Wendy Caplan. She believes “fundamentals remain intact and that investors should be aggressively buying the depressed shares.” Caplan has a 12-18 month price target of $64..

The bottom line: Given the ongoing turmoil in the market, it’s tough to pull the trigger and buy stocks. But if you are a long-term investor, going along with management and buying shares on these kinds of pullbacks like you see in these three stocks should bring decent profits.

Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.