My latest column is up at RealMoney.

I dissect the jobs report to see which industries are showing the best/worst growth in new hiring, on the thesis that companies in these industries may present investment opportunities.

The fastest growing industries are restaurants, hospitals, mine services, machinery, and oil & gas extraction. The worst were transportation equipment and a plethora of housing-related sectors.

Disclosure: At time of publication, William Trent owns shares of Starbucks (SBUX).

Disclosure: Author is long Starbucks (SBUX) at time of publication.

When I said it was too early to buy NBTY (NTY), unfortunately I didn’t mean a day or two early. The stock was up nicely this morning after an analyst upgrade.

Analyst Upgrades NBTY, Stock Surges: Financial News - Yahoo! Finance

Shares of NBTY Inc. surged Wednesday as an analyst upgraded the nutritional supplement maker, citing its solid sales and an attractive stock price.Edward Aaron of RBC Capital Markets said he is more comfortable with his NBTY estimates now partly because the Bohemia, N.Y.-based company recently reported improved sales. Last month NBTY said its January sales rose 6 percent, as strong wholesale results offset a weak retail environment.

As I said in the original article, though NTY looks fairly cheap so do most retailers and consumer companies. Unless we can get through another quarter without a significant earnings miss or downward revision it just seems too early to call a bottom here.

I still think there is better opportunity in names like Tupperware (TUP) or Coach (COH).

Disclosure: At time of publication, William Trent has no position in the companies mentioned.

This article is a reprint of my March 4, 2008 RealMoney column

When I started looking at NBTY (NTY) when it showed up on one of my screens recently, I realized a good chunk of my typical Whole Foods (WFMI - Annual Report) bill was going to their products. NBTY makes vitamins, sport supplements and other products under the brand names Nature’s Bounty, Vitamin World, Puritan’s Pride, Holland & Barrett, Rexall, Osteo-Bi-Flex, Flex-a-min, Knox, Sundown, MET-Rx, WORLDWIDE Sport Nutrition, American Health, DeTuinen, Le Naturiste, SISU, Solgar, and Ester-C.

The health food shops where I pick up my supplements (which are served through NBTY’s wholesale segment) account for nearly half the company’s total sales. The North American Retail segment (457 Vitamin World and 80 Le Naturiste shops) provided 11% of 2007 sales, European Retail (626 stores under a variety of brand names) was 31% of company revenues and the Direct Response/e-commerce segment provided 10%.

These are clearly consumer products, clearly discretionary, and clearly at risk to a consumer slowdown. Given a price of just over ten times earnings and a 10% free cash flow yield, it is also clear investors are aware of this. However, there could still be some downside given that in 2000 valuations troughed at 8.8 times earnings and 0.6 times sales.

For NBTY, the slowdown hit hard in the December 2007 quarter with flat sales and falling margins. That said, the company appears well prepared to weather a slowdown, having cut its debt load from $500 million to $210 million over the last two years. Moody’s recently upgraded its outlook to positive, which is nice for a company with high yield debt in a time of extreme credit market jitters.

The wholesale division has been the company’s strong point, with improving gross margins over the last year. The other half of the business has been poor, requiring store closings in North America. Although European retail performed relatively well in 2007, it was primarily due to currency related issues. In the first quarter, European retail sales declined 4% in local currency.

NBTY is trying to right the retail ship through its store closings and other cost saving moves. The company ended 2007 with 35 fewer stores than it started with. 71 leases are due for renewal in 2008, and the company expects to close 23 more in 2008. NBTY also plans 10 to 12 new store openings this year. In the first quarter, five stores were closed and two opened. These efforts will only be made more difficult if a recession materializes.

I have a few concerns over earnings quality. For example, in each of the last two years the company has reserved less than the actual amount charged for sales returns, bad debt and promotional incentives (an under-reserving trifecta.) However, overall earnings quality measured using the accrual ratio appears strong.

Source: Zacks Research Wizard, compiled by William A. Trent

I’m also nervous about a stock that has had such a big run over the last few weeks. But then again, I had the same concerns about Tupperware (TUP) and it has continued to outperform after rebounding from the same January low. (As a side note, American Oriental Bioengineering (AOB) could represent a catch-up play here.)

The options aren’t generating a particularly good premium right now, so there doesn’t seem much point to a put-write strategy. On the other hand, buying the March $25 puts for $0.15 (as I am writing this) seems like fairly cheap insurance on a long position, given my concerns about the recent run-up.

All in all, though NTY looks fairly cheap so do most retailers and consumer companies. Unless we can get through another quarter without a significant earnings miss or downward revision it just seems too early to call a bottom here.

Disclosures: William Trent has no positions in the stocks mentioned.

Zacks Investment Research has provided Stock Market Beat with a complimentary trial subscription to Research Wizard.

This article is a reprint of my February 12, 2007 RealMoney column

Although I was bearish on NutriSystem (NTRI) in October, I thought the stock might offer a trade surrounding a possible “New Year’s Resolution Rally.” As the New Year began, I offered two potential ways to play the trade:

If we get to, say, Jan. 14 without an announcement, I’d consider that an all-clear signal for the trade.

The actual earnings report will probably come out in early February, along with the guidance for the first quarter that will be so important for the resolution trade. Given the uncertainty around this name, the resolution rally trader probably won’t want to hold for more than a few days past the February announcement unless there is some really good news, and even then it might be wise to clear out before the first quarter is reported in April.

Alternatively, I’d consider writing put options. As of the close on Dec. 31, the Feb. 16 ($25) puts were selling at about $2.00. With the stock at roughly $27, that gives a break-even price of $23 if things go wrong, and an 8% gain in six weeks if things don’t go wrong.

The trade, so far, has been one of ups and downs. Overall NutriSystem has lost 4.7% this year (at the time of writing), which at least puts it ahead of the decline in the S&P 500. For the fleet of foot, an ideal exit opportunity came and went in a flash last Monday when the stock surged more than 13% in one day, only to give it all back (and more) over the remainder of the week due to an analyst downgrade over concerns that the current quarter’s orders were running below expectations.

The options expire this Saturday and the earnings report is due out next Tuesday (the 19th). For those that missed last week’s opportunity, it is time to revisit the trade and think about exit strategies.

As a result of the volatility, the options expiring this week are trading well above the intrinsic value and probably aren’t worth closing out until near the close of trading on Friday. The more adventurous may even want to chance being put the shares in hopes of the company beating estimates or, more importantly, issuing better than expected guidance on Tuesday’s call.

For what it’s worth, I think the $0.30 earnings estimate for the December quarter is in the bag. If there were to be a significant miss it most likely would have been preannounced. The $0.92 expected for the current quarter is $0.12 below the earnings reported in the first quarter last year, despite an estimated 5% sales increase.

It seems like everything is working against NutriSystem right now. First it was expectations that GlaxoSmithKline’s (GSK) over-the-counter weight loss drug Alli could put NutriSystem sales on a diet. After a strong start in June, Alli’s sales over the subsequent 6 months have been slimmer. Meanwhile, the concern over NutriSystem sales has shifted to consumer spending concerns. The expectations of growth in sales but a decline in earnings indicates the company may have expanded its base of telephone representatives (and their related costs) too much, resulting in lower margins.

But that’s where I think the NutriSystem story could start to be one of those “bad news is good news” names. For one thing, it is easy to correct having too many telephone reps, since the voluntary turnover among such employees is enormous. For another, the company has been buying back shares and increased its buyback authorization by $100 million – which is (probably not coincidentally) nearly identical to both the amount of cash sitting on the balance sheet at last check and the amount of free cash flow generated during the last year.

Using a nice round $25 share price, a $100 million buyout would reduce the number of shares by $4 million, or nearly 12% of the total number outstanding. Getting the expenses back in line, along with a substantial share count reduction, could go a long way toward spurring earnings growth once again.

So if I had made the resolution trade (which I didn’t) I think I would wait things out until after the earnings call. The market is anticipating that lots of things will go wrong, and there are also lots that can go right. But that is a risky play, and I can also understand the motivation to lock in a tax loss and the moral victory of beating the S&P on the trade to date.

Disclosures: None

This article was originally published at RealMoney on October 4, 2007.

Less than a month after topping Fortune Magazine’s list of the 100 fastest-growing companies, Nutri-System, Inc.’s (NTRI) growth rate came to a screeching halt. The company announced yesterday that while revenue growth will top 20% in the third quarter it will be well below expectations, and earnings per share are expected to be between $0.62 and $0.66 – barely budging from $0.63 last year and well below the $0.82 consensus. With the shares selling off more than 20% in after-hours trading, investors have to figure out whether this stock’s weight loss is permanent or whether, like many of its customers, it could be on a yo-yo.

To start out with, I’m going to lay my cards on the table and admit I didn’t see this coming. I thought investors were being a bit irrational when they sold the shares following a strong earnings report and slightly weak guidance (that has now been revised to really weak.) So when considering anything I say about the name, remember that I have been dead wrong about it to date.

That said, with the after hours sell-off the stock is now trading at just over 10x the trailing 12-month free cash flow. From that multiple, I feel like I can earn an adequate return even if the company doesn’t grow – all it needs to do is maintain its current levels of cash flow.

The problem is, the aforementioned growth has taken the cash flow off the charts. For example, if the growth had been steady I might feel that free cash flow could retract to the $60 million the company posted in 2006, rather than the $108 million it gained in the last half of that year and the first half of 2007. While that would be a sharp cutback, the free cash flow yield would still offer support from which I would hope for growth.

But what if cash flow dropped to 2005 levels? It is surely possible that Nutri-system, a company more than 30 years old, could drop back to the levels seen two years ago, is it not? Well, if it is possible it would be a big problem. In 2005 Nutri-System’s free cash flow was only $12 million. Next to nothing. And I don’t even want to think about 2004.

So, from my point of view Nutri-System doesn’t qualify as a sound investment opportunity right now, despite an apparently cheap valuation. It might, however, be worth a trade.

One guy who did get this story right was Citigroup’s Gregory Badishkanian, who warned last month that sales may suffer in the short term as dieters try out GlaxoSmithKline’s (GSK) new over the counter weight loss drug Alli. He also noted that the comparisons to last year’s third quarter are difficult as that is when Dan Marino joined the company as spokesman. And, of course, October is not known as the time to start a diet.

The tough comparisons are likely to continue, but Badishkanian doesn’t expect dieters to enjoy the digestive side-effects of taking Alli for very long. After we gorge ourselves this holiday season, we are likely to make the same New Year’s resolutions we have often made in the past. And in each of the last three years Nutri-System has enjoyed a strong rally from January through April.

Personally I feel like I would benefit more from the product than from the stock at this point. If the shares are still down in late December I may even attempt the seasonal trade, and by the time that is done there may be a little more clarity about the sustainability of free cash flow.

In any case, making the resolution play will require a good deal of resolve for this volatile stock.

Large Cap Watch List (Track at Marketocracy) member DaVita Inc. (DVA), announced results for the quarter ended June 30, 2007. Excluding the valuation gain on the Company’s Product Supply Agreement with Gambro Renal Products, and excluding after-tax gains on the sale of investment securities the company earned $0.83 per share, well ahead of analyst estimates. The company also raised guidance for the remainder of the year:

We are revising our 2007 operating income guidance: operating income is now expected to be in the $790-$820 million range. Our previous guidance was for operating income to be in the range of $740-$780 million.

Unfortunately, the company now expects next year to be flat.

Our operating income guidance for 2008, excluding the impact of any potential Medicare legislation, is projected to be in the range of $790-$850 million. We are entering into a period of unusual earnings uncertainty. Therefore the guidance range for 2008 does not capture as high a percentage of the potential outcomes as usual.

Analysts were expecting a double-digit gain in 2008 earnings per share.

Looking at the cash flow statement, I also have some earnings quality concerns. Cash from operations was down despite an increase in net income. Changes in working capital, particularly squishy “other” asset and liability accounts, were the primary reason for the difference. Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, Second Edition cites large changes in other assets and liabilities as a warning sign.

Mid Cap Watch List (Track at Marketocracy) and Large Cap Watch List (Track at Marketocracy) member Laboratory Corporation of America(R) Holdings (LH) announced results for the quarter and six months ended June 30, 2007. Excluding restructuring and other special charges recorded in 2007, net earnings increased 14.1% to $132.8 million. Earnings per diluted share (EPS) increased 20.7% to $1.05, compared to $0.87 per diluted share in the second quarter of 2006. Excluding restructuring and other special charges recorded in 2007, EPS increased 25.3% to $1.09, in line with consensus estimates.

Revenues for the quarter were $1,043.1 million, an increase of 15.4% compared to the same period in 2006 and ahead of the $1.03 billion consensus. Looking ahead, the Company expects revenue growth of 13% to 14%, EBITDA margins of approximately 26.4% to 26.9%, and diluted earnings per share of between $4.11 and $4.27. With the consensus at 13.5% revenue growth and $4.21 in earnings per share, the apparent margin pressure (relative to expectations) is forecast to continue.

The Economic Calendar is quiet in the early part of this week but there are important reports at the end of the week. On Thursday is the Durable Goods report, for which the consensus estimates a 2.0% increase. On Friday is the Preliminary Estimate of 2Q GDP, which the consensus has pegged at 3.2%. That sounds a little high to me based on the economic data table I’ve been compiling.

EconomicData

The Earnings Calendar is as busy as it can get. Some of the names I’ll be watching:

Monday

• Altera (ALTR) - Xilinx (XLNX)  filed an awful report. Can Altera do any better? Consensus is $0.19 EPS on sales of $314 million.
• Hexcel (HXL) - This Small Cap Watch List (Track at Marketocracy) member was seeing rising estimates until last month, when they were cut from $0.20 to the current $0.17.
• Steel Dynamics (STLD - Annual Report) - The Mid Cap Watch List (Track at Marketocracy) member is expected to earn $1.04 on sales of $948 million.
• Texas Instruments (TXN - Annual Report) - expected to earn $0.42 on $3.45 billion in sales.

Tuesday

• CH Robinson (CHRW - Annual Report) - estimates have been rising and now stand at $0.47, but Landstar (LSTR - Annual Report) disappointed.
• CDW Corporation (CDWC) - stellar monthly sales reports have kept estimates rising. They now stand at $0.97.
• EMC Corporation (EMC - Annual Report) - The big news is still the VMWare IPO, but it is also a decent look at enterprise tech spend.
• Laboratory Corporation of America (LH) - The Mid Cap and Large Cap Watch List (Track at Marketocracy) member has been seeing positive earnings revisions and is now expected to earn $1.09 on $1.03 billion in revenue.
• Lexmark (LXK) preannounced and will probably offer poor guidance.
• Linear Technology (LLTC) - expected to earn $0.35 on $267 million in sales.
• Norsk Hydro (NHY) - The Large Cap Watch List (Track at Marketocracy) member has no analyst coverage right now.
• Plantronics (PLT) - my covered call position is now being cashed out so I’ve no skin in this one. But it is often volatile.
• United Parcel Services (UPS) is a great read on the health of the economy. Expectations are $1.03 on $12.23 billion in revenue.

Wednesday

• Arkansas Best (ABFS) - after Landstar’s (LSTR - Annual Report) weak quarter I’m expecting a poor showing. Estimates have come down to $0.67, but may not have come down enough.
• Colgate Palmolive (CL) - Large Cap Watch List (Track at Marketocracy) member unlikely to surprise much. Consensus is $0.83 on $3.31 billion.
• Corning (GLW - Annual Report) - is LCD supply/demand back in balance?
• Freeport McMoRan Copper & Gold (FCX - Annual Report) -Another Large Cap Watch List (Track at Marketocracy) member with dramatic positive earnings revisions, now standing at $2.71.
• Graco (GGG) is another Large Cap Watch List (Track at Marketocracy) member. Estimates have been coming down and are now at $0.61.
• MEMC Electronic Materials (WFR) - Is polysilicon supply catching up to demand for this Large Cap Watch List (Track at Marketocracy) member?
• Xerox (XRX) - can they make the numbers without asking investors to ignore a bunch of stuff? I don’t doubt they will earn $0.27 as expected but wonder how they’ll get there.

Thursday

• Federated Investors (FII) is on the Large Cap Watch List (Track at Marketocracy) and expected to earn $0.54.
• Ingram Micro (IM) is on the Small Cap Watch List (Track at Marketocracy) and expected to earn $0.36.
• KLA-Tencor (KLAC) - I know the semiconductor equipment fundamentals stink. I want to know how much and whether it is priced in.
• NII Holdings (NIHD) is on the Large Cap Watch List (Track at Marketocracy) and expected to earn $0.49.
• Western Digital (WDC) is on the Large Cap Watch List (Track at Marketocracy) and expected to earn $0.36.

Disclosure: William Trent has a long position in SMH.

Genentech 2Q profit rises 41 percent:

In a pattern now long familiar to investors in one of the world’s largest biotechnology companies, Genentech Inc. again reported a surge in profit, crediting its best-selling cancer drug for its continued hot streak.

Yet the stock is down on the news. As I noted in my earnings preview:

Genentech (DNA - Annual Report), which I own in my personal account, reports on Wednesday. They should beat the $0.71 consensus number, but the cancer treatment approvals aren’t coming as fast and furiously as they used to.

But the story is far from over. The good news: During the quarter, the company began eight Phase III clinical trials. Those studies include Lucentis as a possible treatment for eye problems caused by diabetes and Avastin for a specific form of lung cancer and as a second-line treatment for colon cancer.

Hopefully some of those will set the approval train rolling again.

Disclosure: Author is long Genentech at time of publication.

Mid Cap Watch List (Track at Marketocracy) member American Oriental Bioengineering (AOB), which will also join the Small Cap Watch List (Track at Marketocracy) as of Friday afternoon, has announced it will issue a secondary offering for 8 mln shares:

Pharmaceutical company American Oriental Bioengineering Inc. (AOB.N: Quote, Profile , Research) said in a regulatory filing that it will offer 8 million shares and selling stockholders will sell 500,000 shares.The company expects about $63.8 million in net proceeds from the sale, assuming an offer price of $8.60 per share. It plans to use the proceeds primarily for sales and marketing of products, acquisitions and research and development activities.

True, the company is spending $30 million to acquire a Chinese company. But the company already has $90 million in cash on the balance sheet and no debt. It also has consistently generated enough free cash flow to replenish its account. With the stock down more than a third since the January highs, I am perplexed by the decision to issue shares right now. To me it suggests there is either another very large acquisition in the works, or management is concerned about the future cash flow.

Insiders, by the way, are selling about 7% of the shares being offered, although they will still be significant shareholders.