Unlike me, my Stocks and Shares ISA could do with fattening up. As well as lose weight, one of my New Year’s Resolutions is to get out of my comfort zone and consider investing in a wider range of companies. Historically, I’ve remained loyal to FTSE 350 stocks.
But after a period of solid – albeit unspectacular – capital growth, I’m going to cast my investment net a little wider this year.
Piling on the pounds
One stock I recently came across was The Gym Group (LSE:GYM). It offers ‘cheap and cheerful’ gym membership. Think of it as the Premier Inn of fitness clubs.
It has an attractive business model. Users can pay monthly and are therefore free to leave at any time. The group’s 240+ gyms are open 24/7. It currently claims 900,000 members (February 2021: 547,000) who appear to rate their experience highly.
Planning to capitalise on this over the next three years, the group intends to add an additional 50 gyms to its portfolio. Impressively, it’s intending to do this using its surplus cash. There are no plans to borrow (or approach shareholders) to fund this expansion.
And there could be more gyms to follow. With 10.3m people visiting one at least once a year, the UK health & fitness market’s now worth £5.4bn.
Encouragingly, investors appear to like what they see. The company’s share price increased by nearly 50% in 2024.
However, looking back to the start of 2019, it’s down 48%. Unsurprisingly, the pandemic wasn’t kind to the business. The initial lockdown saw its share price fall by over two thirds. It lost 45% of possible trading days due to government restrictions.
But the shares are now 60% higher than their post-pandemic low. This sounds very positive to me.
On the other hand…
But I have some concerns. Despite its impressive growth, it remains a small business.
Its market-cap’s currently around £274m, which makes it vulnerable to an economic slowdown (or another pandemic). Although the UK economy’s expected to grow in 2025, recent financial data’s been disappointing. Consumer confidence appears low, which is a worry to me.
I’m also concerned that the company’s going to abandon its low-cost model. It says it’s £2 a month cheaper than its closest rivals and wants to narrow this gap because its members “ascribe a higher value to their gym membership than they currently pay”.
But if it becomes like all the others, I fear it’ll find it harder to compete successfully.
The core problem
However, my biggest concern is that the company’s barely profitable. During the six months ended 30 June 2024, it reported a post-tax profit of only £200k.
Analysts are forecasting a loss for the full year. The situation’s then anticipated to improve in 2025, with an expected profit before tax of £3.1m. However, based on current corporation tax rates, the stock’s currently valued at 118 times its forecast 2025 post-tax earnings. Ouch!
It therefore appears to me as though much of the company’s growth potential has already been factored in to its share price.
I’m therefore not going to invest right now. But I shall continue to consider other smaller (cheaper) companies to add to my Stocks and Shares ISA.
