Cheap, high-calorie food and drink has had an impact on the world’s health and perhaps even economy, but if you’re smart it could make you a tidy profit from this development. Here’s how.
What do Coca-Cola, Starbucks and McDonald’s have in common? They are loved by Americans and consumers throughout the globe, if their latest performance is anything to go by.
The fizzy-drinks maker and the world’s largest cafe chain both unveiled higher-than-expected quarterly profits this week. McDonald’s saw net income climb 12% in the second quarter, well ahead of forecasts.
While stock markets around the world have had a wild ride due to high unemployment, jitters over Europe’s debt crisis and signs that China’s growth is slowing, it seems that consumers have not given up Coke, lattes, muffins and Big Macs.
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Howard Schultz, founder of Starbucks, believes the company has broken the historical correlation between downturns in consumer confidence and slowing sales: consumers might once have been quick to give up little luxuries like their daily cappuccino when money was tight, but not now.
Others say the recent downturn has buoyed the convenience food sector. “Consumers are choosing a reduced monetary spend over a reduced waistline,” said Phil Wong from stock broker Redmayne-Bentley.
“In the UK, Domino’s Pizza, for example, has demonstrated remarkable growth. A year ago the shares traded at 245p, but are now around 415p - a 69% increase.”
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‘Globesity’ epidemic
Against this backdrop, it’s hardly surprising that waistlines around the world are expanding so rapidly that health experts have coined the term ‘globesity’.
One-third of the world’s adults are overweight and one in ten obese. The US and Britain are, unsurprisingly, among the 10 fattest nations worldwide, with 66.7% and 61% of their populations carrying excess weight, according to data from the World Health Organisation (WHO).
Once seen as a quintessentially western phenomenon, obesity is fast becoming a major health concern in rapidly developing countries, like India and China, where fatter wallets are changing lifestyles.
“The global urban population is expected to grow from three billion to five billion by 2030, with the majority of this growth expected to come from developing countries. Companies such as McDonald’s are well positioned to benefit from that growth,” said Nicole Vettise, a portfolio manager for the JPM Global Consumer Trends fund, which has holdings in Coca-Cola and McDonald’s.
WHO estimates that, by 2015, the number of overweight adults will reach 2.3 billion - equal to the combined populations of China, Europe and America.
Bad for the economy
Obesity has serious economic consequences. Expanding waistlines cost the US economy $147 billion in 2008, almost double the $78.5 billion bill in 1998, according to RTI International.
The overall cost to the UK economy, allowing for time off work and early deaths, is estimated at £7 billion a year, including a £2 billion cost to the National Health Service. British government thinktank Foresight has estimated the epidemic could cost some £45.5 billion a year by 2050 if rates of obesity continue to climb.
Good for shareholders
The growing trend could help investors pile on pounds of a different variety. “The recent takeover of Cadbury provides another example of how exposure to potentially less healthy foods and snacks can be beneficial for investors,” said Keith Bowman, an analyst at Hargreaves Lansdown Stockbrokers.
“‘A little of what we like’ does generally appear to be good for investors. What we might categorise as ’sin’ stocks - tobacco, alcohol, snacks or fast food - often have qualities which appeal to investors: brand strength, strong cash-flows and progressive dividends.”
Kraft, the US food company, bought British confectioner Cadbury in a controversial £11.7 billion takeover in January, since when its shares have ticked up 6.4%.
Other stocks have piled on more: Coca-Cola Corp shares have risen 8.3% in the past 12 months, while McDonald’s Corporation sharesare up 20.9% and Starbucks shares have soared 48.2%. All are rated as a ‘buy’ by analysts polled by Reuters.
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Food and drink beat ‘lost decade’
In the past decade companies in the food and drink sectors have hugely outperformed the market. The FTSE All-Share Sector Food Producer index is up 80.5% over 10 years and the FTSE All-Share Sector Beverages index has risen 150.8%, according to Alpha ShareScope. The FTSE All-Share Sector Tobacco index has made a stellar 378.5%.
At the same time, the FTSE All-Share Index has lost 14.2% - in what has been dubbed a ‘lost decade’ for investors.
Drug companies could profit
Rising obesity rates also have huge implications for firms in the healthcare sector and savvy investors could reap the rewards.
“Being overweight or obese leaves people at high risk of heart disease, diabetes, high blood pressure and osteoarthritis and increases the likelihood of developing several types of cancer,” said Darius McDermott, managing director at discount broker Chelsea Financial Services.
“Many obese people will look to the quick-fix in drug therapies to control their bulging waistlines rather than changing their diets and taking more exercise. This means there’s a serious opportunity for drug companies to fatten their profits if they can get approval for new therapies.”
Not for faint-of-heart
This type of investment isn’t for the faint-hearted, though. Last week, the US Food and Drug Administration (FDA) said that the first potential new prescription weight-loss pill in more than a decade works, sending shares in its maker, Vivus Inc, up 19.7%.
However, two days later the stock sunk 62% after the FDA said safety concerns about the drug outweighed its ability to help patients shed pounds.
Other fat-pill hopefuls are Arena Pharmaceuticals and Orexigen Therapeutics, whose shares have endured mixed fortunes. Arena’s shares are up 44.8% since the start of 2010, while Orexigen’s have tumbled 41%. Shares in Vivus have lost 46.1% over that period.
“Taking a bet on drug companies to grow their stock prices on the basis of pending FDA approbation is a high-risk strategy,” said McDermott.
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Healthcare stocks faring well
You could, instead, look to get limited exposure to the theme through a diversified fund operating in the health sector.
McDermott likes the Axa Framlington Health fund. Its analysts are currently examining innovative new treatments for obesity and the unit price is up 24.3% in the past year, according to fund data provider Trustnet.
Healthcare companies that produce treatments for diabetes, strokes, heart disease and joint replacements could also prove a stable bet. These include the likes of dialysis products and services firms DaVita, of the US, and Fresenius Medical Care, of Germany. Their shares have risen 23.8% and 31.2% respectively in the past year.
Shares in British medical device manufacturer Smith & Nephew are up 21.3% over 12 months, but those in Sanofi-Aventis, the Paris-based leader in diabetes treatment, which JPM Global Consumer Trends also invests in, are down 11.6%.