Top Picks 2017: GNC Holdings

01/06/2017 6:00 am EST


John Reese

Founder and CEO, And Validea Capital Management

For our top pick in 2017, I used my guru-based screening application to look for stocks with high scores from at least two of my guru models, explains John Reese, editor of Validea.

I focused on fundamental strategies based on Buffett, Graham, Lynch, Zweig, Neff and a number of others and stocks with the lowest relative strength, meaning the stocks that have underperformed the most over the past 12 months.

Since this is an aggressive pick, we can look for a name that looks to be extremely oversold and being priced for a worst case scenario.

These are the types of stocks that Ben Graham called cigar butt stocks in the sense that you may be able to pick them up and take one last, but really good puff and get it for virtually free.

One of the stocks that meets this criteria is GNC Holdings (GNC), an $890 million specialty retailer of health, wellness and performance products.

The firm has been punished by investors like many other brick and mortar stores as the threat of sales moving online threaten these business models. The stock, which has a relative strength 9, trades at $13.02 (it's 52 week high is $35.90).

However, from a fundamental perspective, the rock bottom valuation and decent historical long term growth help the shares score highly through the Ben Graham deep value approach and the Peter Lynch growth-at-a-reasonable price model.

The Graham value method likes the low P/E of 4.9 and current ratio of 2.6. The Lynch model looks at the yield adjusted PEG ratio as a key indicator.

With a yield of around 6% right now, the yield adjusted PEG is around 0.22, which makes the stock very attractive based on this measure.

Both the Graham and Lynch models penalized the shares for the high level of debt -- GNC has a debt to equity ratio of 439% so the firm is clearly highly leveraged.

Any improvement in the firm's underlying business relative to expectations could move the stock dramatically higher. Keep in mind, this a small cap name with lots of leverage so the stock can exhibit lots of up or downside.

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Editor Note: Last year, John Reese chose Lydall (LDL) as his Top Pick; the shares rose 74.3%. He now says, "At one point, Lydall scored highly based on multiple strategies but given the stock's strong run and valuation, the shares aren't as attractive based on my guru models as they were a year ago. 

"The shares still get high marks based on our Lynch model, but none of our other quantitative strategies score the stock above 70%. With a P/E ratio of 28, the shares look expensive relative to the market, although the firm does boast a much higher growth rate vs. the broader market."

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