A Stout Picture of Health

 | May 29, 2012 | 12:30 PM EDT
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Retailers serving very specific target markets have been in the news recently, especially after PetSmart (PETM) was unleashed last week. The stock ran 13.9% after quarterly earnings, rallying to an all-time high of $64.36 Thursday.

Nutritional-supplement retailer GNC (GNC) has also been a healthy performer: The stock got support at its 10-week line in the past few weeks, and finished last week with a gain of 8%. It's now consolidating below its April 27 high of $41.95. Shares reached that peak a couple days after the company trounced first-quarter earnings estimates.

GNC shares have shown some volatility recently, but that's been consistent with the general market. The stock gapped down on April 30 after the Food and Drug Administration warned about dangers of workout supplements containing a substance known as DMAA.

A similar business that's also had some up-and-down price swings lately has been Vitamin Shoppe (VSI). It, too, fell on the April 30 news. But, as with GNC, the stock found support above key moving averages.

Vitamin Shoppe reported its first quarter on May 8, and vaulted 15.3% that day, and reached a new high of $55.29a few sessions later. Then, as the major indices tumbled, so did Vitamin Shoppe. While GNC has held at its 50-day line recently, Vitamin Shoppe is getting support near its shorter-term 20-day average, an excellent sign of technical strength.

Both Vitamin Shoppe and GNC are what I consider recent initial public offerings -- Vitamin Shoppe made its NYSE debut in October 2009, while GNC began trading in April 2011.

It's often a good signal when the stocks of companies from similar businesses are performing well at the same time. It can indicate that the overall industry is showing strength. In fact, both of these names have shown double-digit revenue growth in the past several quarters, as well as profit growth of 30% or higher in every quarter in the past two years. In addition, analysts see double-digit earnings growth for both Vitamin Shoppe and GNC in the next two fiscal years.

Still, it's wise to also be aware of the differences here. Namely, GNC is a mid-cap, with a market capitalization of around $4.2 billion. It trades about 1.9 million shares a day. Vitamin Shoppe is a smaller company, with a market cap just shy of $1.5 billion, and about 470,000 shares change hands per day, on average.

Both stocks are technically in buy range but, as I've been writing during the past few weeks, the market downturn continues to prevent me from making any new purchases. Both stocks are also showing technical strength, so neither appears to be a short candidate at this time.

While the fundamentals are slightly stronger on GNC, in terms of earnings growth, the chart action on Vitamin Shoppe is somewhat better at this moment. I don't like to trade two such similar stocks simultaneously, so if I decide to buy one of these, it will be determined by the technicals once the market goes back into rally mode.

Clearing prior highs could serve as buy signals, but support above short- or medium-term moving averages may also serve as the indication that either of these stocks is ready to go. If they appear to be showing equal technical strength, then the fundamental leadership of GNC would tip the decision in that stock's favor.



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