The Oxford Club has been recruiting subscribers by dangling the promise of their “$3 Secret Stock” for almost a year now, and those ads are still rolling around the interwebs… but it looks like they’ve finally got a new recruitment tool: The “Next American Mega-Brand.”
So what is it? Let’s check out the ad, see if we can get you some answers, and talk about the stock.
The basic spiel, which comes from George Rayburn but is really about a pick being made by Oxford Club honcho Alexander Green, is that there’s an “hours old” buy list that big Wall Street firms are using, and you can get in on it too, if you only join the club (the sub they’re pushing is $99/yr)….
“What I’m holding in my hands is one of the most coveted documents in the financial world.
“It’s hours old.
“Wall Street firms and professional investors are spending billions to get their hands on lists like this one.
“And 4 out of 5 hedge fund managers use the lists to help pick their next big stock.”
You know what else is “hours old?” Me. It’s a lot of hours, true, I’m about 450,000 hours old, but still, that’s technically not a lie. And I don’t feel a day over 350,000. Whenever you see an ad use a term like that, whether it’s hours or months or days, keep in mind that squishy terms for units of time are a way to build urgency using your assumptions instead of their assertions — and to seem like you’re making a timely promise without getting in trouble with your lawyers for, you know, “lying.”
And apparently this list leads right to the next great American brand. Here’s some more from the ad:
“… the key lies with the company right here at the top….
“Alexander Green, has dubbed the company at the top of this list the “Next American Mega-Brand.”
“Because unlike Nike, Starbucks, Amazon and the others… this company is still small and relatively unknown.
“And it has a huge runway of growth ahead of it.”
We also see a little leap of logic to connect this “list” to past huge successes like those household names, as well as Netflix, National Beverage Corporation and Turtle Beach, each of which enjoyed stock market surges.
The ad references these “lists” in a few different ways — another example given is the research that people did about the Tesla factory a couple years ago, using cell phone tower data to figure out how many people were working on the night shift over time, and interpreting those trends to guess at when production would increase.
So it’s likely that they’re just referencing a kind of in-depth research that’s done by large investors — or more often, by consultants who put together research reports and sell them to a bunch of different hedge funds and investment banks. Data collecting is a big business for Wall Street, you’ll also see firms doing aerial surveys of the suburbs to count how many cars are at the shopping mall, or how full the lots are at the various auto dealerships, and try to turn that data (and particularly trends of changing data) into some actionable intelligence or an “edge” for big investors. It doesn’t always work, for sure, and not every piece of data is important — particularly if it’s available to everyone — but the research business is big in investing.
So what “list” is this “Next American Mega-Brand” at the top of? It looks like it’s some list of companies that are trending via social media… which, they argue, means that the company is quietly building a bigger brand. Here’s more from the ad:
“When companies begin to trend in terms of social media, word of mouth and sales…
“As measured by tracking credit card purchases, cellphone geolocation, social media and internet traffic…
“A handful of the world’s smartest investment researchers start to actually tally up which companies are getting the most attention…
“And then Wall Street gets these lists… with the most active companies at the very top.”
And the ad goes over the top a little bit…
“… this is like having a window into exactly which companies are about to surpass earnings estimates every single quarter…”
Not necessarily… partly because the people making those estimates are the same ones who are buying this research. When a plurality of analysts and institutional investors already know something, it’s going to be reflected in the valuation and the share price.
Maybe that won’t matter in growth-happy times like we’ve lived through for the past several years — if companies can trade at 30X sales and all they need is “more beat and raise” each quarter to keep investors happy and keep the stock surging, then I suppose the cabal of analysts and institutions can keep that trend going to some degree. But it’s not magic, and it’s not secret — if data can be bought, Wall Street’s price-setters will own that data.
The specific list that they’re talking about is the “Facebook ‘We’re Here’ Count” — the tracking of people who check in on Facebook from a physical location. Apparently this “Mega-Brand” beat out 41 other companies (why 41? No idea) in topping the “We’re Here” count. More from the ad:
“During February, the Next American Mega-Brand saw significant growth in foot traffic in the form of a half-million or so status updates and other Facebook posts at retail locations around the country…
“Leaving household names like Disney World and IHOP in the dust!
“Now get this: The Next American Mega-Brand is in a sector that always sees a decline in foot traffic and sales during the midwinter months…
“And yet the Next American Mega-Brand STILL beat out 41 other companies on this list!”
And they do drop a few hints about the company… which is exactly what the Thinkolator was waiting for…
“It’s a small company right now. It’s in the Russell 2000 small cap index.
“But Alex doesn’t think it will be small for long…
“Because as we’ll show you, it’s already started a run-up that could send shares up in value 6X… 25X… even 65X from here if it follows the same trajectory as recent brand breakout stories like Lululemon, Domino’s Pizza… and maybe even Priceline.com….
“This company has started beating quarterly earnings estimates. And Wall Street analysts are beginning to notice and ratchet their ratings up to a ‘Buy’ for the stock…
“Which of course attracts more attention and begins to drive up the share price…
“This is already happening.
“This stock is beginning to lift off, my friends…
“Last month, a high-profile financial television pundit picked up the story…
“And announced to the world that this company is an unbelievably well-run business with a phenomenal brand.
“‘It knows exactly what it’s doing,’ the pundit concluded.”
And the stock is also apparently being compared to Amazon…
“According to this highly respected Wall Street research firm, the Next American Mega-Brand is a platform that will accumulate consumers in a way that closely resembles Amazon.”
And we get some financial info:
“… our up-and-coming Next American Mega-Brand’s revenue jumped 14.43% in 2016. In 2017, it increased another 13.67%. Last year, revenue jumped again, to 33.26%.
“In fact, for the last three fiscal years, the Next American Mega-Brand has produced average revenue growth of more than 73%.
“Right now, we estimate it could double its current annual sales by 2019!”
Let me just check the calendar for a sec. Yep, I knew it! It is 2019! And the ad isn’t particularly old, I only saw it for the first time about ten days ago.
Is this company really going to double its sales this year? That sounds like a bit of a stretch… but they indicate that growth has been accelerating, not decelerating, and stranger things have happened. We are, at least, getting closer to a solution.
Then, from the order form:
“This Potential Moonshot Stock Has Lifted Off, and Its Share Price Is Surging After Each Earnings Announcement. The Next Announcement Is Expected on Shortly!”
The odd grammar (“expected on shortly!”) is probably because the copywriter wanted to put in a specific date, since that always helps improve response rates… but someone at Oxford Club must have realized that they might be running this same ad every day for six months, so they have to keep it general.
“This company is combining all the key elements for fast-growing success: a great business model (growth financed from cash flow, not debt), great management, happy employees and customers, a brand people are flocking to in droves because of the wonderful customer experience, and a major long-term expansion opportunity.
“In fact, this little dynamo operates in an industry that the biggest and most powerful companies in the world are betting their futures on. I’m talking about companies like Google and Apple and their plans to ramp up and create products that will enhance the experience the Next American Mega-Brand is creating for its customers.”
OK, that’s an embarrassment of riches to feed to the Thinkolator — what do we find? Well, I shoveled all that data in… the top-secret Facebook list, the revenue, the subscription business model, and we got an answer to check against the other clues — and it’s a perfect match this time, so I can tell you that the “Next American Mega-Brand” is… Planet Fitness (PLNT)
And don’t get too antsy about that urgent “beat” that’s coming — they just reported a month ago, so it will be another two months before they release another quarter. They did place pretty well in that February “We’re Here” count from Facebook, as covered in this article that has numbers precisely matching the tease. It may be relevant information, but it’s not “hot” or “hours old” — the data comes from February, and articles about it were written almost immediately after that in early March.
And in case you’re curious, nobody (with the possible exception of Alexander Green) thinks their revenue will double this year — the estimate is that 2019 will see sales growth of about 15% from 2018, with similar growth over the next few years. And though the shares did see a nice surge after their November and February quarterly reports, the teaser chart in the ad actually misrepresents the date of the early May report — it didn’t come a the trough of its move on May 3 or 4, it came on May 2 and caused that little trough. The stock did recover a bit in the following days as analysts jumped in to defend the shares, but the initial reaction was negative as they missed their sales estimates and beat the earnings forecast by just a penny.
Planet Fitness is, to be sure, a growth stock, and they are growing impressively — their guidance was to expect “adjusted net income per diluted share” to increase by about 25% in 2019, and that’s very nice growth.
The valuation reflects that, of course. PLNT trades at 11X sales, and about 50X the 2019 estimates for earnings — or if you want to go out a bit further, at a forward PE of 40 based on 2020 estimates.
And yes, as you would probably have guessed, the “high-profile financial pundit” quoted in the ad is CNBC’s Jim Cramer, and he did indeed say of Planet Fitness that “they know exactly what they’re doing” (comparing them favorably with Weight Watchers, which apparently doesn’t).
So do you think they know what they’re doing? Planet Fitness is known for having a low-cost subscription program, avoiding the nickel-and-diming of some gyms that charge for all kinds of classes and services and, with their “no judgement” attitude, providing a place for people who are turned off by the high-end beauty gyms that attract the beautiful people.
I’ve never been in a Planet Fitness — sadly, it’s not because I’m busy posting photos of my abs on Instragram — but they seem to be cropping up everywhere lately. The death of the department store has apparently been pretty good for them, since mall operators are seeking out high-frequency tenants like gyms who can fill those huge spaces and tempt daily customers to the food court or the sporting goods store. There’s one that’s been open for a while near our town in an old shopping mall, taking the place of a bunch of small storefronts next to the dying JC Penney’s, and there’s another one opening right down the street from me in an old Staples slot at the strip mall.
Whether they’re really great places or are just cheap and un-intimidating for new customers, I don’t know. There is obviously competition, some of it also expanding quickly (Anytime Fitness, 24hrFitness, LA Fitness, etc.), but none of the competitors seem to really focus on the low-end prices and the “newbies welcome” attitude. Cramer’s story continues with this quote, “Its vibe has stayed the same from the very beginning. This is a fun gym that doesn’t treat fitness like a religion.”
The offering certainly seems more compelling than most traditional “fitness centers” — they have free group training sessions, they are usually open 24 hours a day, and they have lots of treadmills and the other machines that people don’t want to wait in line for. And perhaps most importantly, they’re cheap — here in Western Massachusetts its $10/month for the basic (access to one club) and $22 for the “black card” (access to all clubs, other special stuff like hydromassage and tanning and free wifi), with no commitment — and even that $22/mo is less than half of any gym I remember ever joining. That must be particularly compelling in cities, and it looks like even the midtown Manhattan location is priced more or less the same. The CEO says that they’re “going after the 80% of the population that doesn’t have a gym membership,” and they are making a pretty compelling value proposition.
It’s a pretty big company, with the 1,800 locations almost entirely owned by franchisees (about 96%), and they think they can hit 4,000 stores just in the US (and up to 300 in Canada), so they aren’t topped out on growth just yet. They were founded in New Hampshire just over 25 years ago, and didn’t open their first franchise until 2003, so they’ve grown very fast and do have their densest store base in the Northeastern US.
The company went public in 2015, and the franchise-fueled growth has certainly been good for the stock price — it was not an initial hit with investors, the first six months was weak into 2016, but since then the shares have almost quadrupled in value. The last year was particularly strong, perhaps thanks in part to the lower tax rate, but they have generally improved their margins as they’ve grown… thanks to the fact that a growing store base paying that large 7% royalty fee (recently raised from 5%) helps to fuel a lot of efficiency (and advertising). And they also require all franchisees to buy Planet Fitness-branded equipment, which they presumably get a discounted price on from the major fitness manufacturers, and to refresh that equipment every 5-7 years, so that will be another perpetual revenue source. The “average revenue growth of 73%” claim in the ad is odd, they’ve never had annual growth at that pace… but revenue has grown roughly that much over the past three years.
Franchisees seem pretty happy, which is important — and they’re showing that happiness by opening up multiple locations, with 150 franchisee groups owning many of their locations, and 90% of their new openings coming from existing franchisees – which is a nice sign for a franchise company. Real estate is widely available in many areas, the unit economics look pretty appealing if the company’s example is fair (the “illustration” in their Investor Presentation indicates that franchisees get 25% unlevered returns on average sales of $2 million, which is a lot for a ~$2-3 million investment — that must mean these examples have ~10,000 customers, which is presumably easy in some towns and impossible in others).
Planet Fitness has a somewhat surprising amount of debt for a franchise business — they own less than 100 of their stores, but still have over a billion dollars in debt, some of which was used to buy back stock. It’s not dangerous, they can cover it pretty easily at this point and they have staggered terms for the debt and it’s not particularly expensive, but it does suck up some of the cash flow.
So when I look at this one I see appealing growth, improving margins, and a pretty good chance that they can expand quite aggressively without cannibalizing the business, particularly in the South and West where they are not quite as saturated.
The low-cost model, with relatively light staffing, means that although the low rents of smaller towns are probably appealing to franchisees, they presumably require a pretty huge customer base to justify the up-front investment in construction and equipment. You can’t have 500 customers and make it work if you have to invest $1.5 million dollars to get started, I assume, I would guess that you need to get to at least several thousand. But still, there are a lot of towns of 50-100,000 people out there that can support a low-cost gym, and the marketing and brand building has been pretty strong.
Planet Fitness’ business looks pretty impressive, and I love a “regional to national” retail expansion story that doesn’t face much Amazon competition… so on that level it reminds me a bit of Five Below (FIVE), which has had a nice run, and the fact that it’s a franchise model makes the expansion even faster and cheaper. There’s something almost magical about a company that’s both expanding quickly and seeing rapid same-store-sales growth (in PLNT’s case, they posted a huge 10% jump in same store sales in the first quarter, so it’s not just new locations that are fueling the top-line revenue growth).
Sadly, though, Wall Street is aware of this, and now that they’ve proven the growth potential to some degree the stock has gotten quite expensive. There is a little bit of a short position, roughly 6% of the float is short, but that’s not enough to say this is a “battleground” stock… and there aren’t a lot of pundits or investors championing the shares (most of the largest shareholders are index funds), so they don’t get a huge amount of coverage despite the strong run the shares have made.
With ~25% earnings per share growth I can see taking a nibble here at 50X current-year earnings and watching and learning if you’re willing to take a chance on a retail growth story, that’s a PEG ratio (price/earnings/growth) of about 2, which is the top end of what I could consider reasonable… just know that it can fall apart quickly the first time a real chink in the armor appears, whether that’s just the end of “beat and raise” quarters or a real crisis, like the failure of a major franchisee.
I know we’ve seen fitness chains come and go before, and I don’t know the history of the industry at all, so it may be that there are much larger risks out there than I’m assuming, but I like the opportunity they have right now with lots of shopping mall vacancies and a well-marketed low-cost gym option. The biggest risk I see, unless there’s some franchisee revolt simmering that I’m unaware of, is the high valuation and double leverage — they’re levered themselves, and their franchisees are presumably also levered up to buy or build out their gyms and purchase equipment, so if the next crisis is a debt or real estate crisis then they could pretty quickly hit stormy sea — that seems unlikely, since the world likes to throw different crises at us each time, but you never know.
You can check out their Investor Presentation here if you’d like to get an overview of how they’d like to be seen by investors, and their latest conference call transcript from last month is here. They should report again in early August, so you’ve probably got time to think it over.
Disclaimer: Among the companies mentioned above I own shares of Facebook, Disney, Amazon, Apple, Google parent Alphabet, and Five Below. I will not trade in any stock covered for at least three days, per Stock Gumshoe’s trading rules.