As the novel coronavirus pandemic continues to impact lives, Dr. Anthony Fauci recommends a good diet, lots of sleep and low stress to boost immunity. Fauci also believes that regular exercise is one of the best ways to reduce stress. The pandemic has also restricted movement, and people have preferred at-home workouts rather than gyms. This has translated into focus on home-fitness stocks.
Further, the pandemic has resulted in temporary headwinds for some industries. For other industries, the changes could potentially be permanent. A survey suggests that 60% of Americans “enjoyed their home workouts [during quarantine] so much, they now plan on canceling their gym membership for good.”
If this holds true, at-home workouts and fitness stocks will continue to witness strong growth even after the pandemic is over. It therefore makes sense to have one or more of these fitness stocks in your portfolio.
This article will discuss four fitness stocks to keep your eye on as the home-workout trend continues. Let’s discuss these names, which have the potential to boost the health of your core portfolio:
- Peloton Interactive (NASDAQ:PTON)
- Lululemon Athletica (NASDAQ:LULU)
- Nautilus (NYSE:NLS)
- WW International (NASDAQ:WW)
Fitness Stocks: Peloton Interactive (PTON)
PTON stock is my top pick among fitness stocks. For the current year, the stock has already surged 290%. I would wait for some correction before fresh exposure to the stock.
As an overview, Peloton Interactive is in the business of fitness products that include the Peloton Bike and the Peloton Tread. These products feature touchscreens that stream on-demand classes.
The company is on a high-growth trajectory, and this explains the stock surge. For the first quarter of 2021, the company reported revenue growth of 232% year-over-year. As a matter of fact, the company’s annual revenue growth has been more than 100% for the last six years.
Further, for Q1 2021, the company reported positive adjusted EBITDA of $118.9 million. For the prior year, adjusted EBITDA was negative at $21 million. As the company’s EBITDA and cash flow increases, the stock will continue to trend higher.
The company’s operating cash flow (OCF) for the first quarter was $312 million. This implies an annualized OCF of $1.2 billion. With the pandemic triggering demand for at-home fitness equipment, the company’s core business will be a cash-flow machine.
Given the growth and future outlook of the company, PTON is a high-growth portfolio stock. If the stock does fall below $100 on profit booking, it would be a good time for fresh exposure.
Lululemon Athletica (LULU)
LULU stock also stands out among the attractive fitness stocks. The company is in the business of athletic apparel, and I expect demand to remain strong in the coming years.
In terms of the company’s growth potential, the brand is ranked third in Evercore ISI survey results among teens and young adults. The top two brands are Peloton and Apple (NASDAQ:AAPL).
Considering the brand attraction, I expect the company’s growth to remain healthy. For the next five years, the company’s annual earnings growth will likely be 20%. In the near term, the holiday season is also likely to support the company’s growth.
Another point worth mentioning is that for Q2 2020, the company opened eight stores in the U.S., seven in Asia and two in Europe. The company’s focus on Asia’s high-growth market is likely to ensure the top-line accelerates in the coming years.
With the novel coronavirus pandemic impacting store sales, the company has also built a strong online presence. For Q2 2020, e-commerce revenue totaled 61.4% of the total revenue.
Deutsche Bank believes that LULU stock is also worth considering with the company likely having a “margin recovery story.” If the EBITDA margin does expand in the coming quarters, I expect the stock to continue trending higher.
NLS is another fitness stock that should be in the investment radar. For the current year, the stock has skyrocketed by over 900%. The stock has corrected from highs, but I would wait for some more profit booking before fresh exposure.
Nautilus manufactures products that include home gyms, free-weight equipment, treadmills, indoor cycling equipment, ellipticals and fitness accessories. The pandemic has triggered strong demand for the company’s product, which is reflected in the turnover and EBITDA growth.
For Q3 2020, the company reported sales of $155 million, which was 152% higher year-over-year. Adjusted EBITDA was $37 million compared to a negative adjusted EBITDA of $6 million in Q3 2019.
In Q3 2020, the company delivered its highest quarterly sales in a decade. In addition, the quarter was the fourth consecutive quarter of positive cash flows. Strong top-line growth gives a clear indication of change in consumer preference toward at-home fitness equipment. With new product launches and a focus on improving margins, the positive growth momentum is likely to sustain.
I would therefore look at buying NLS stock with a long-term horizon.
WW International (WW)
Among fitness stocks, I would also keep WW stock on your investment radar. The stock has been an underperformer for the current year with a decline of 22%. However, in the last month, the stock has gained 13.4%. I believe that some exposure can be considered at current levels with the stock gaining momentum.
The company focuses on wellness and weight management. According to the Centers for Disease Control and Prevention, the prevalence of obesity increased from 30.5% in FY1999 to 42.4% in FY2018. With people being more health conscious as a result of the pandemic, the company’s growth is likely to gain traction.
WW International is looking at e-commerce growth along with product expansion in the coming quarters. With 4.7 million subscribers at the end of Q3 2020, I am optimistic on the growth outlook.
However, if I had to choose just one among the fitness stocks, I would go for PTON stock or NLS stock.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.