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The nutritional supplement industry has been on a tear since the Great Recession. While sales have increased a modest 9% from '09 to '11 (from $23B to $25B in annual sales revenue), the investment market in nutritional supplements has been much more impressive lately.

Take for example three of the largest players dealing strictly in this area, Herbalife (HLF), Vitamin Shoppe (VSI), and General Nutrition Center (GNC). Herbalife's operating income has gone up 90% during the same period that the entire industry's sales went up only 9%, and they are on track to go up another 20% this year extrapolating from quarterly data. HLF stock, however, has been even more impressive, moving from a low of $6.50 in '09 to over $45. That's a move of over 600%, and that already includes a drastic crash from a high of over $72 last April in response to allegations that they do not disclose the percentage breakdowns of their distributors.

Vitamin Shoppe is a similar success story. Operating income for the company is up 86% since '09. 2012 so far has been spectacular, with income for the last three quarters already topping all of last year's performance by 8%, and the holiday season hasn't even been included in the calculations yet. As for VSI, the stock has gone up over 230% since October '09, and deservedly so.

Thirdly, we have GNC. Since going public, the stock has gone from $16.75 to $35, a jump of 108%. During that time, operating income went up 56%, and similarly to Vitamin Shoppe, GNC's operating income for the last three quarters has already exceeded all of last year's by an amazing 20%, not even counting Q4.

If this sector has escaped your notice for the past three years, I'd venture to say that you have missed most of the ride; but not all of it. Of the three stocks mentioned above, the numbers suggest that HLF has the least room to run as they are exhibiting the least growth of the three, and the stock has already expressed the most gains of over 600%. A projected 20% increase in operating income, impressive as that may be, is not going to warrant those types of gains again, especially since the others are already beating out last years' numbers with Q4 still to go, and their stocks have not moved nearly as much as HLF. The fact that the stock crashed from a high of over $72 to $46.20 in a week over relatively minor allegations about distribution percentage disclosures signifies how overbought the stock really was at the time, and still may be. Investors just needed an excuse to unload a stock that was clearly going parabolic, and they got one. The only thing HLF has going for it over VSI and GNC is its relatively low P/E ratio of 11.8.

VSI comes in second in terms of long options. I would be wary of buying any company that has gone up 230% in three years, but the fact that income has already exceeded all of last year's signals the chance of an end-of-year pop that could be impressive. Given the choice of a stock that has already gained 600% with projected income increasing by 20%, and a stock that has gained only 230% with income projected to increase much more than that, I'll take the latter regardless of the P/E ratios.

It is GNC, however, that has the most room to run. While the stock has only been publicly traded since April '11 after two previous attempts, it has been consolidating for 7 months now since gaining 144% from April '11 to April '12. A 7 month consolidation for a company whose earnings have already exceeded last year's by 20% with Q4 still to go, is a recipe for another leg up. How much it will be I don't know, but of the three it has the least capital growth for the most impressive income performance.

Whichever one you pick, if any, will probably not come close to the gains seen since '08-'09 until now. For that you'll need to take on substantially more risk. There are few rational picks in the nutritional supplement sector that are worth betting on, but one of them is a company that sells to both Vitamin Shoppe and GNC. If you've ever been to a GNC or Vitamin Shoppe outlet, you may have noticed MusclePharm (MSLPD.OB) products there. MusclePharm sells (page 6) its nutritional products in 5000 GNC as well as 450 Vitamin Shoppe stores.

While they have never pulled a profit, their revenue has increased 437% from 2010 to 2011. Even more impressive is that their revenue from the last three quarters is over $50M, exceeding all of last year's revenue by 200% already, and 2010 revenue by an astonishing 1480%. Clearly, they know how to sell their stuff, and MusclePharm products are flying off the shelves at GNCs and Vitamin Shoppes all over the country. What's holding them back is their administrative expenses and cost of revenue, which as a young company around only since '08, they clearly have not mastered minimizing. Simply stated, the company needs to be run more efficiently, and up to now this has not been accomplished.

Worth noting is that MSLPD just went through an 1:850 reverse split, seeking a respectable price per share, more liquidity, and a possible listing on a major stock exchange. What I think they're really after, however, is an acquisition. They have a popular brand name and they sell well. They just need a company with some extra cash that knows how to run itself efficiently to get them into shape.

To sum it all up, if you've missed the last three years and forgot to invest in the nutritional supplement industry, the safest bet with the most promise at this point is GNC. MSLPD is of course a more heterodox option for people with stronger stomachs, but if MusclePharm can get someone interested in their brand to run it well and finally turn some profits out of their massive revenues, then we might be looking at another Herbalife.

Source: Catching The Tail End Of Nutritional Supplements' Massive 3 Year Run