Herbalife Ltd. (HLF): Healthy trade

By Dr. Melvin Pasternak, editor Double-Digit Trading

As a leading weight management company that sells diet shakes, snacks and nutritional supplements, Herbalife (NYSE: HLF) is appealing both technically and fundamentally.

Herbalife is rallying off a three-month low. Several technical signal indicate HLF is on the rise. Fundamentally, the company remains attractively valued.Due to rapid expansion in the market for weight-loss products, Herbalife's revenue and earnings growth potential are strong.

Currently, two-thirds of Americans battle obesity. And as we get bigger, the demand for weight loss products keeps growing. In 2010 alone, for instance, the market for weight loss products is projected to grow +19.0%, to $69 billion.

And, the need for weight-loss products extends far beyond the United States. The World Health Organization estimates that one-third of all adults across the globe are overweight. In five years, the number of overweight people is expected to reach 2.3 billion.

For Herbalife -- a global company that distributes its weight loss products in 72 countries through a network of 1.9 million independent distributors -- this adds up to potentially huge profits in the coming years.

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As the weekly chart shows, the stock appears to be in the early stages of emerging from a correction. Consider these factors:

After hitting a bottom at $11.90 in March 2009, the stock surged a whopping +280%, to a high of $45.18 on January 15, 2010 -- the day the S&P 500 also peaked. Since then, HLF shares have fallen, along with the S&P, creating a short-term downtrend.

However, this past week, the stock rose past the short-term trendline. HLF also just bounced off support at its rising 30-week moving average, a positive sign. It is edging closer to the 10-week moving average.

On the daily chart, not shown here, stochastics has given a strong buy signal, as has MACD. RSI, after hitting its most oversold level in more than a year near 30, has rebounded to back over the 50 level, a bullish sign.

Fundamentally, Herbalife shows strong growth potential. The company is scheduled to release fourth-quarter results at the close of trading Wednesday. During the past three quarters, HLF has reported positive earnings surprises of +15%, +8% and +23%, respectively.

Other fundamental factors:

The five analysts who follow the stock expect revenues for the most recent three-month period to increase +16.3% from a year earlier, to $596.52 million.

For the fiscal year, revenue is expected to drop marginally as the company was negatively impacted by the recession. However, for 2010, the outlook brightens; analysts expect revenues to rebound back to $2.55 billion, a gain of more than +11% from 2009.

Fourth-quarter earnings are expected to jump nearly +32% from the year-earlier period, to $0.91 per share.

Although fiscal year 2009 earnings are expected to drop about -4% from the previous year, to $3.23 per share, earnings should see a solid recovery by next year. Earnings in 2010 are expected to rise to $3.70, an +18% gain.

Despite strong growth projections, the company remains attractively valued. Herbalife has a trailing (P/E) of 14.0. Its one-year (PEG) ratio is 0.78. Any number below one is considered good value. HLF's return on equity (ROE) is an incredible 59.2%. In comparison, the S&P's ROE is approximately 13.0%.

Given the company's attractive valuation, combined with positive technicals and a rapidly growing market for weight loss products, HLF is well positioned to bulk up.

If earnings come in above expectations and the S&P continues to rally, the stock should test the January high near $45. I am therefore setting my target at $44.95.

My stop-loss is $34.19. At this price, HLF would fill a break-away gap formed in early November when it posted blow-out earnings. The risk reward ratio is about 1.18:1 based on Tuesday's entry price of $39.13. Buy HLF at $39.13; set an initial stop loss at $34.19 with a target price of $44.95.

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