Thursday, January 14, 2010

Medifast responds, again, to short-selling convicted felon (MED)

Weight loss firm Medifast (MED)is on the defensive today, as the selling has really picked up in its stock.  People might be buying into the arguments of confusing or misleading representations the company has made.

Shares are off 14% today on massive volume, with over 6.8million shares already traded.  The stock is off 34% from recent highs near $35 per share, a nice gain (or not, depending on his exact short sales prices, which are likely much lower than the peak) for short-seller Barry Minkow, a "reformed" fellon who now runs the Fraud Discovery Institute.  The FDI is a platform for him to release reports bashing companies in which he has a short (or put option) position.

The trouble is, Minkow's attacks are very weak from a legal standpoint.  In the case of Medifast, he argues that the company's use of its customers to become "coaches" with great income potential is fraudulent in its promises of career advancement.  This is incredible difficult to prove, and also a bit difficult for Medifast to defend.  You don't want to put out a press release stating "Our business might be shady, but it's definitely legal."

Medifast issued a release today defending themselves, but with virtually no supporting data, which could be why the stock is falling so hard.  Instead of attacking this company's business model, if I were Minkow I'd simply attack the valuation.  Medifast looks like they will make $14million in Free Cash Flow this year, which is a small 4% Free Cash Flow Yield even after the shares have tanked..  Yes, rapidly growing companies like this deserve a higher valuation (= lower Free Cash Flow Yield), but if questions about the business model are legitimate, then the "growth premium" will evaporate.  To be continued...

Minkow's most recent letter to Medifast:
Open Letter to Board 011210

Copyright 2010 AlphaNinja

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