Buy this undervalued stock before anyone else
Bear markets are a long-term, income-oriented investor’s best friend. This is because investors are able to stretch their dividend income further with new purchases than would otherwise be the case.
With the S&P500 the index has been hammered 22% so far in 2022, there are tons of stocks that have been unfairly cut by half or more this year. And the stock nutrition and weight loss Medifast (NYSE:MED)down 53% since the start of the year, is arguably one of those stocks that has been unfairly punished.
Let’s see why the stock’s monstrous 6.4% dividend yield and incredibly cheap valuation could prove to be a great long-term buy.
Long-term growth prospects remain good
Medifast is a weight management and nutrition company known for its Optavia weight loss coaching program. What sets the company apart from others in its space?
Unlike programs that prioritize fad diets, Optavia recognizes that healthy, sustainable habits are the best path to weight loss and sustainable weight management. And Optavia also has more than 68,000 active and empathetic coaches who were once in the shoes of customers. Combining a healthy approach to weight loss with the human element has been a winning formula for the company; Medifast has touched over 2 million lives since its inception in 1981.
And don’t let the poor year-to-date performance of stocks fool you: Of course, Medifast is facing challenges this year with demand due to high inflation and a deteriorating economic outlook. That’s why analysts expect non-GAAP (adjusted) diluted earnings per share (EPS) to decline 11.6% to $12.28 in 2022.
But the good news is that the tailwinds that have led to diluted EPS adjusted annual growth of 45.9% over the past five years are largely intact. Of the 175 million Americans looking to lose weight and considering dieting, more than half (95 million) are interested in the coaching services and meal plans offered by Medifast, according to the company.
And as successful as Medifast has become over the years, its more than one million customers barely scratch the surface of its full potential. That’s precisely why analysts expect diluted diluted EPS growth of 20% annually over the company’s next five years.
A massive dividend with low risk of cuts
Medifast’s 6.4% dividend yield is nearly four times the S&P 500’s 1.8% yield. And while it’s rare you’d expect an outsized dividend yield to be safe from a cut, the company’s dividend appears to be sustainable.
Indeed, Medifast’s dividend payout ratio is expected to reach just under 52% in 2022. Under normal circumstances, this is a payout ratio that provides a sufficient margin of safety for a decline in profitability. . And it also gives Medifast the capital to grow its business and buy back stock.
But what makes the payout ratio even better is that, while the company’s earnings are likely to rebound in 2023 and beyond, the payout ratio is also expected to dip below 50%, even with increases. double-digit dividend.
The stock is very cheap
Medifast’s short-term challenge to profitability and resulting stock weakness appear to have set the stage for long-term investors.
Indeed, the forward price-to-earnings (P/E) ratio of 6.6 is a boon for a company whose earnings are still expected to grow at a double-digit pace in the medium term. This is likely why the analysts’ 12-month average price target is $278, implying a 171% upside from the current stock price of $102. That equates to a P/E/Growth (PEG) ratio of just over 0.3, making the high-yielding, fast-growing stock an obvious buy.
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Kody Kester holds positions at Medifast. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.