Trade of the Day: GNC (GNC)

Vitamin retailer GNC (GNC) started the year close to $60 and has given up about 40% of its market cap after back-to-back quarterly guidance retreats. While the shifting fundamentals argued convincingly for a lower price, the move now seems to have gone too far. This stock could become interesting as we go into the next earnings report, which should come very soon.

Back in February, investors were comfortable with GNC at a price/earnings (P/E) ratio around 15x. The stock bumped up to $52 per share at a consensus earnings per share (EPS) target around $3.46 for fiscal 2014. After the warnings, the earnings target has been reeled in by 14% to $3.04 – a number that GNC management seems confident they can hit – but with shares down here below $35, the P/E multiple has pulled back to 11.5x current EPS.

And while GNC has been warning that growth is not what Wall Street was looking for, the company is still growing. According to the latest guidance, sales are tracking about 4% above last year’s levels, and a higher-margin product mix is driving about 6% earnings expansion.

Compared to rival Vitamin Shoppe (VSI), which is growing a bit faster on the top line off roughly half the base and currently justifies a P/E of 17.5x current consensus, GNC seems cheap. If you believe that Americans and global consumers will keep buying sports and dietary supplements, the choice between the two stocks should be clear.

Where this trade gets interesting is the timing. GNC should report its second-quarter results this week. The risk, of course, is that management will miss its own target of $0.79 per share on $707 million in revenue. However, even a slight turnaround in the business creates a catalyst for Wall Street to judge current valuations as compelling.

Any revenue expansion beyond current consensus will put GNC on a course to beat targets by the end of the year, while any sense that the summer is turning out slower than originally hoped will keep shares on the defensive and be a reason to sell. But so much negativity is already priced into this stock that confirmation of an ongoing downside scenario will likely be greeted with more of a yawn than with a fresh round of selling.

The more intriguing possibility – an upside surprise that sparks a relief rally – is too real to ignore. The GNC chart seems to support this take on sentiment, as the price action has repeatedly reached for support after each quarterly disappointment. The stock is only 3.7% below the 50-day trend here, so even a small sustained push could put it in breakout position.

Should GNC fight its way above $36 ahead of earnings, the technical sky is open for speculators to swoop in…and, of course, after earnings we should know exactly where we stand on the fundamentals.

Weighing the long and short scenarios, I think that GNC has what it takes to outperform in the near term. After quarterly results, if guidance looks brighter, it will be hard to find shares at this price.

Hilary Kramer is the editor of several financial advisory services designed to help individual investors profit from her stock picking talents — including Hilary Kramer’s GameChangersBreakout Stocks Under $10 and High Octane Trader.

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