A Supplemental Strategy

 | Aug 16, 2012 | 5:30 PM EDT  | Comments
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Stock quotes in this article:

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nus

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med

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shf

On Thursday, nutritional and weight-loss supplement maker ViSalus filed with the SEC for an initial public offering. The move makes a lot of sense: It's currently part of Blythe (BTH), a company in the less-than-exciting industry of candle making. Blythe also markets home d├ęcor and home fragrance products, as well as the Sterno brand of tabletop food-heating gear. But spinning off a supplement maker seems like a smart move at a time when more Americans are fitness conscious and turning to the supplement industry.

ViSalus, which uses a multilevel marketing type of sales structure, is hoping to raise $175 million in its public offering. The company has not released details about pricing or the size of the offer. Blythe will remain a majority owner -- perhaps a clue about the eventual float size. This way of unlocking value immediately resonated with me when I saw the IPO announcement. Set loose a stock in a growth sector, rather than trapping it with candles, Sterno products and home knickknacks.

I immediately ran some scans of other companies in the nutritional supplements sub-sector. Nu Skin (NUS), maker of anti-aging products, was in the headlines Thursday as the stock tumbled nearly 4%, further into the hole, after news that Stanford University said Nu Skin was improperly representing the research relationship between the two entities.

But the focus on Nu Skin's decline can mask success in other sub-sector names that are trading near new highs.

Medifast (MED) has been on a tear, vaulting 42.8% in July, and another 1% so far this month. As of Thursday, it was trading between $28 and $29, consolidating nicely below its August 8 52-week high of $29.14. The fundamental case is solid, with analysts expecting income of $1.40 per share this year, up 7% from last year. In 2013, the earnings growth rate is seen increasing to 17%, with Wall Street eyeing income of $1.64 per share.

Schiff Nutrition (SHF), which makes vitamins, sports nutrition products and other supplements, rallied to an all-time high of $19.82 Thursday. It's up more than 80% year-to-date, far outpacing the indices. This is a very small stock -- exactly the kind that can sport big rallies. But it's also the kind of company that escapes media attention, meaning retail investors are often unaware of its potential. Schiff's market cap is $571 million, and the stock moves only 47,000 shares per day, on average. One of the keys to the stock's rally is analyst optimism about Schiff's earnings potential. Profit is seen growing 68% in fiscal 2013, to $0.79 per share. In fiscal 2014, that number is expected to grow 22%, to $0.96 a share.

Schiff is just barely buyable, hovering about 1% above its five-day exponential moving average. With any further gains, though, I'd prefer to wait for the next short-term moving average pullback.

As you'd expect from a thinly traded stock like this, there is a volatility issue: Schiff has a beta of 1.15. Traders should take that into account when entering a thin stock. In addition, always remember that if one big investor takes profits, that could send shares sharply lower.

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