By
The Wall Street Flaneur
:
We were hunters and foragers. We were bounded only by the earth
and the ocean and the sky.
The frontier was everywhere
. But as we have collectively evolved to push the
limits of these frontiers
, we as individuals are confronted with seemingly ever-narrowing
daily boundaries - our cars, our cubicles, our couches. Last year,
the Red Cross announced that for the first time, obesity had been
the root cause of more deaths than malnutrition. Obesity is an
issue facing many developed nations of the world, but in the United
States, with nearly 70% of adults overweight or obese, it's become
an epidemic. Why? How? Study after study reveals an X-factor, but
there is no one culprit.
Over the past 50 years, we've witnessed significant changes to
our food supply, our food habits, and our lifestyles. These primary
factors have converged to propagate a culture that is largely
sedentary and, while overfed, under-nourished. What does this mean
for society at large? What trends are driving this and are they
reversible? Are we prepared to treat the wave of obesity-rooted
ailments? Will change come from the top down or bottom up, some
combination? Or are
we doomed
?
Time will tell, but we are responding. And in this response,
there exists investment opportunity. Reflected in the markets are
the efforts of minds hard at work to treat obesity's ailments, to
help trim the fat, and to provide more nutritive foodstuffs. Our
team will take you through the factors contributing to obesity, the
outcomes of obesity, and the investment opportunities the obesity
trend presents.
Obesity in America: An Investor's Perspective
Before we dive in, let's set the…stage. We know we are big
getting bigger - the numbers very clearly show it. Check out
this time progression
illustrating the percentage of "obese" residents by state sourced
from the CDC. And in graph form:
Over the course of thousands of years, man
evolved
from nomadic communities to agrarian-based societies to a state of
industry. And he did so with major changes to diet yet little
change to body mass. But as he embraced the office environment,
particularly over the last 30 years, his mass has grown
disproportionate to any other feature, with the obesity rate
doubling from 15% to 30% since 1980. This represents a wholesale
change that the human body simply cannot adapt to quickly enough,
if ever, and the trend continues to increase.
Causal Factors
Food Factors
Fast food, packaged and frozen food, and snacks are ubiquitous -
anyone can see that. But the presence of high fructose corn syrup,
hydrogenated oils, and soy byproducts are little more than
afterthought, at least compared to after-effects. As corn and soy
yields continue to increase (except this summer), prices in real
dollars are declining - and until the mass market demands
otherwise, the typical food manufacturer will continue to include
these as filler.
It's not just ingredients that have changed but also our portion
sizes. Consider the
graphic here
from the CDC. Portion sizes for soft drinks and food alike have
increased appreciably over the course of the last few decades. All
told, the average American consumes roughly 500 incremental
calories per day as compared to 1980.
With physical activity declining concurrent with caloric intake
increasing, the net result is significant weight gain.
Lifestyle
Speaking very broadly, when it comes to our lifestyles, it's a
tale of two tales. On one hand, as a 24/7 society we are more
"active" than ever before, but on the other, less than 5% of adults
meet guidelines for physical activity. Unfortunately, the
"activity" constitutes more time in sedentary work environments,
more time
sitting in traffic
, more time
consuming media
, and less
time sleeping
. Television is just one facet of the sedentary lifestyle, but the
amount of time the average American household spends watching
television each day is pretty telling.
These create a time premium for food - with many turning to the
convenient: fast food, unhealthy snacks, and packaged and frozen
foods. We don't mean to imply that all food consumed outside the
household is unhealthy - it certainly isn't - but a large amount of
it is, and the reality is that 55% of our food spend is on food
consumed outside the home. Consider that in 1970 restaurant
revenues were $43 billion. Today, they have increased to $538
billion at a well-above inflationary clip.
Outcome
Over the course of the last century, what's ailed us has changed
markedly. In the early part of the 20th century, influenza, TB, and
pneumonia were some of the leading causes of death - today, the
leading causes are heart disease, cancer, stroke, diabetes, and
kidney disease. These can't be directly attributed to obesity, but
it's no great leap of faith to connect many of these to obesity.
Here are a few statistics, according to prominent studies:
- If you're obese, you're 83% more likely to develop some form
of kidney disease.
- Asthma rates increase by 52% in obese persons.
- 36% of adults have some sort of cardiovascular disease.
- Fatty livers are found in 25% of the population. This can be
caused by excess alcohol intake, but deposits also come from
excess fat intake stored in the liver.
- Diabetes is growing at an alarming rate, with approximately
20-25 million people diabetic and an estimated 57 million
classified as pre-diabetic. Type II diabetes, which is caused by
a combination of lifestyle factors and genetics, accounts for
90-95% of all diabetes cases. Barring a significant change, this
troubling figure is only expected to rise.
(click to enlarge)
More troubling, we're still learning about the long-term effects
of obesity particularly the long-term effects stemming from
childhood obesity. A recent study indicated that obese children end
up suffering from diabetes later in life roughly 1/3 of the time -
today, childhood obesity stands at approximately 20%, a figure that
has tripled since 1980. Compounding this trend is the fact that
many children consume a significant portion of their daily caloric
intake at schools. A recent USDA study showed that while 89% of
parents believed school lunches to be healthy, 94% of them failed
to meet USDA guidelines with 80% of them including excess fat and
saturated fat content.
Action
Treatments
As with any other ailment facing humans, treatments have been
developed and new and improved treatments are in the works. Below
are a few of the major providers of obesity-related treatment:
- Novo Nordisk A/S (
NVO
) - a Danish pharmaceutical company with a global presence, one
of the top insulin companies in the world. The company is
organized into two divisions: (i) diabetes and (ii)
biopharmaceuticals with diabetes accounting for nearly 80% of the
company's revenue and almost 100% of the company's growth. More
than 40% of the company's revenue is from North America, which
also accounts for more than 60% of the company's growth. But as
much as we've focused on the US, there are others facing diabetes
epidemics, including southern Europe, China, and India, where
Novo has either a strong foothold or has demonstrated strong
growth potential.
- DaVita, Inc. (
DVA
) - leading provider of kidney dialysis services. Procedures are
rendered in both outpatient centers and contracted hospitals. The
company increased its network of patients serviced in the US by
13% in 2011 and recently commenced international operations. A
long-term, secular play.
- VIVUS, Inc. (
VVUS
) - pharmaceutical company focused on obesity in addition to
diabetes, sleep apnea, and sexual health. The company recently
received approval for its obesity drug, Qsymia, and is ramping
for launch in H2 2012. As a relatively small company (as pharmas
go), this is a riskier play. While it's encouraging the company
received approval to sell Qsymia (the FDA is normally none too
kind to obesity drugs) and there have been recent strong insider
buying trends, a setback in the drug's launch or a discovery of
adverse side effects, would prove a major negative impact to the
company's valuation.
Preventative
If we're ever to reverse the trend, it will come not only from
treating obesity's consequences, but also from preventing it in the
first place. And there are signs of that all around us. A walk down
a city block reveals gyms, organic grocery stores, and a comeback
of the local farmer's market. "All natural," "organic," "cage
free," and "farm to table" have become in a relatively short time,
mainstream terms used to describe our food. But the relative
shortage of public companies in this space reflects its nascence -
and we think that bodes well for growth prospects. We like these
companies that promote a healthy lifestyle.
- GNC (
GNC
) - we know, household name, doesn't seem glamorous. But we like
the supplement company's international expansion efforts,
acquisition of luckyvitamin.com (to compete with the discount end
of the spectrum), vertically integrated model, and its ongoing
revenue growth and margin expansion. The stock is in something of
a mini pullback on the heels of DB's downgrade (to hold, price
target $42) but we think there is more upside and that the
pullback represents a buying opportunity.
- Fresh Market (
TFM
) - a peer of Whole Foods Markets (WFM). We like Fresh Market
better because of its fast-growing footprint and, in particular,
its strategic position in the South Atlantic region and its
recent entry to the West Coast market. According to the
Natural Food Merchandiser
's 2012 Market Overview, the South Atlantic market posted the
highest regional growth in consumption of natural and organic
products, with the West Coast market the fastest growing the year
before. The company is posting strong same-store growth, widening
margins, and just raised its earnings guidance.
- United Natural Foods (UNFI) - distributor of organic and
natural foods in both Canada and the United States. A pure
long-term secular play on the growth of the organic and natural
food market.
- Annie's, Inc. (BNNY) - provides packaged organic and natural
food selections. We think Annie's product offering marries up
well with the demands of our on-the-go society that has to become
increasingly health conscious. Despite a successful IPO, the
stock has seen some significant volatility. We like this stock
but think it's overbought right now. Wait for another dip in the
$32.50-$35 range.
Conclusion
In an age where one could make a strong case for a number of
forces as modern society's single threat - HIV/AIDS, terrorism,
deep and prolonged economic depression - history may ultimately
show it to be the fight against calories. With healthcare costs
mounting, childhood obesity at an all-time high, and life
expectancy declining, we are nearing a watershed moment. Which way
the river breaks, though, will be a function of education and
awareness, thoughtful leadership, personal accountability,
effective treatment, and diet makeup.
Disclosure:
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
See also
Trading Around A Core: The Big Picture
on seekingalpha.com