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Small Cap Low-Risk Pick No. 4: Planet Fitness Inc.

By Motley Fool Staff - Apr 8, 2016 at 8:48AM

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How the low-cost gym chain's strategy opens the door to new growth, and how it doesn’t.

Planet Fitness (PLNT -4.94%) prides itself on being the cheapest option for budget-conscious gym-goers.

In this clip from the Rule Breaker Investing podcast, Motley Fool co-founder David Gardner talks about how the company's new ad campaign and its smart business model make it a Rule Breaker investment pick. He also lists a few potential drawbacks to the company, including how its focus on being the low-cost gym of choice might hurt it going forward. 

Check out David Gardner's other favorite companies:

A transcript follows the video.

This podcast was recorded on Feb. 10, 2016. 

David Gardner: Stock no. 4 this week is Planet Fitness. Planet Fitness is trading recently at about $14 a share. The market cap? Kind of the same size as Ellie Mae, a smaller company. It's $1.4 billion. This is one of our most recent picks, so this is a pretty fresh pick coming from our Motley Fool Rule Breakers service. In fact, it was the end of January when we purchased it. I'm happy to say, yes, I can even say this, not about many stocks, but it is up. It is up since we purchased it, recommending it on Jan. 27. The market is down, lots of our stocks are down. 

Planet Fitness, you may have seen their marketing: "No Lunks." I like this business. It is a membership subscription business, and it is hitting the mass market for people who want to work out. Not people who really work out, not those other people, but people maybe more like me. I might include you with me here. But, those of us who want a simpler, cheaper, lower-key approach to staying fit. So Planet Fitness, for example, has a $10 initiation fee. Try that at your local gym. See what it take to just get started for that membership. Usually, you're paying more than $10. In fact, Planet Fitness throws in a T-shirt for you for your $10 initiation fee. And then, speaking of cheaper fees, $10 a month. Check that out against any competition you see in your local area. I submit it is going to be much cheaper. But this is a company that is making money from those price points by being disruptive. No frills.

Now, it does mean you don't get a lot of stuff at Planet Fitness. You're not going to get day care. There are no juice bars. There are no fitness classes, that I know of, anyway, at Planet Fitness. No racquetball courts or swimming pools. They're just keeping it simple with treadmills and workout gear, and creating a well-lit, friendly space that people can return to and not feel like they have to impress others with the shape of their body or how strenuously they're working out. "No Lunks," as Planet Fitness says.

This is a business that has more than 6 million members, and my general investing principle that I want to highlight for this one, stock no. 4, is that I love subscription businesses. In fact, we have one at The Motley Fool. It's a model that I like a lot. If you do a good job by your customers, not only have they purchased from you, but they will then renew their subscription with you if you do a good job. If you don't, if you make bad stock picks or have broken treadmills, then people will not. They won't come back the next month or next year. But it's a wonderful business model because it replaces its revenue in a much more reliable way than many other businesses that have to keep going out there and scrabbling around to get growth. So that's a happy dynamic we have here at The Motley Fool, and, certainly, Planet Fitness, a much larger company than The Motley Fool, is one example. But whether you're talking about Netflix,or AOL back in the day, or any number of these kinds of regular subscription business models, I favor them greatly. They're usually very numerical, they're very predictable, and it really focuses the company that's doing it on making sure its customers are pleased, that there's satisfaction, and they want to renew for one month or year to the next.

So that's Planet Fitness. Now, my one cautionary note about PLNT on the NASDAQ: This is a company, first of all, that we don't know quite as well compared to the other companies I've talked about. We usually have multiyear associations. These are long-term investments, and I'm letting you in on them and saying I like them today, I especially like them watching what the market has gone to some of these. But we have less association with Planet Fitness, so I don't know it as well as some of the others that I'm talking about. 

And I'd like to mention in particular a cautionary note about its low-fee business. So typically, I favor companies are more of the premium brands in their industries. Those are usually the companies that have pricing power, that can raise prices. People don't really notice if, with Tiffany, if the diamond is a little bit more next year than it was this year. It's Tiffany. When Netflix raises prices -- it is in the process of doing so, modestly. I think it's an incredibly great deal, what I'm paying Netflix for streaming monthly right now. But Netflix has that ability, I think, to raise prices over time. Planet Fitness has really predicated a lot of its business on the idea that it is the low-cost provider and low-cost player. That's not often as comfortable a place for me to feel confident in my investing. But, that said, when you have a disruptor, and somebody who has fun with their marketing, and I think really appeals to the broadest group, those of us who don't work out intensely everyday but still think it's a good thing, of course I favor this company.

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