Shares in UK gym operator The Gym Group (LSE: GYM) are having a good run at the moment. Since 9 November 2020, when Pfizer announced it had developed a Covid-19 vaccine, Gym Group’s share price has risen more than 100%.
Is this a ‘reopening’ stock I should consider for my portfolio? Let’s take a look at the investment case.
GYM shares: 3 reasons to be bullish
There are certainly things to like about the Gym Group shares right now. Firstly, a lot of the Covid-19 uncertainty has disappeared. When I last covered the stock, back in early November, I saw the shares as quite risky. At the time, we didn’t have a Covid-19 vaccine and the UK was on lockdown. The uncertainty here was very high.
It’s fair to say that the vaccine news has been a game-changer for the company. Not only have gyms across the UK been able to reopen, but people now feel much safer going to them.
Secondly, trading has been solid. In a trading update posted in late May, the company advised that total membership numbers had increased from 547,000 at the end of February to 729,000 at 24 May.
Third, the company is looking at accelerating its new site opening programme. In May, it said it’s having discussions with its banks about increasing financial flexibility.
Has The Gym Group share price climbed too high?
I still have some concerns about The Gym Group shares however. One is that, after the recent share price rise, the stock is now close to where it was pre-Covid-19. That doesn’t make a lot of sense, in my view.
For starters, the group has issued new shares since April 2020. This means its market-cap is now higher than it was pre-Covid-19.
Secondly, while membership numbers have jumped, they’re still about 8% below December 2019 numbers. And the company recently advised it expects to see limited gains in membership over the summer months.
Additionally, the company is expected to post a substantial loss this year. For FY2021, analysts expect the group to generate a net loss of £31m. In 2019, it generated a net profit of £3.6m.
Finally, the company has more debt than it did pre-Covid-19. At the end of 2019, net debt stood at £47.4m. At the end of April however, it had net debt of £63m.
Insiders are offloading GYM stock
Another concern is that recently, insiders at The Gym Group have been offloading quite a lot of stock. On 8 July, for example, CEO Richard Darwin sold 350,000 shares at a price of £2.78 per share. This represented about one third of his holding. Meanwhile, in late March, founder John Treharne sold 500,000 shares at a price of £2.52 per share. This represented about 20% of his holding.
In my view, these large sales suggest insiders see limited share price upside in the near future. It’s also worth noting that after the recent share price rise, the stock has a very high valuation. Currently, it’s trading at about 95 times next year’s earnings.
GYM: my move now
Putting this all together, I don’t see a lot of appeal in The Gym Group shares right now. I think a lot of reopening optimism is already priced into the stock. All things considered, I think there are better stocks I could buy today.