Fat profits seem to follow obesity-related investments

Obesity nowadays is practically a worldwide disease. Since all obesity-related industries operate in a growth environment, equity investments in that field are attractive. 

“The obesity epidemic may be the most pressing health challenge facing the world today, because of both its direct impacts and ripple effects on chronic diseases, such as diabetes,” says Sarbjit Nahal, head of Thematic Investing for Bank of America Merrill Lynch Global Research.  

Most alarming is the growing number of overweight people worldwide. According to the World Health Organization, since 1980 the number of people who weigh too much has doubled; 2.1 billion people are considered overweight and 671 million are considered obese, with 39 percent and 13 percent, respectively, of those age 18 and older. According to current forecasts, by 2030 around 4 billion people could be affected. 

Sitting is suicide, research shows. Among other things, sitting increases the risk of heart disease, diabetes and cancer. The idleness increases the risk of obesity – with all the associated negative consequences.  

But the increase in obesity is not only caused by sitting around too much, but also by eating too much. The McKinsey Global Institute estimates the associated costs, such as for healthcare, investments to reduce the negative consequences of obesity or the resulting loss of productivity, at around $2 trillion. This corresponds to roughly the gross domestic product (GDP) of Italy, or the equivalent of 2.8 percent of the global GDP. 

In an essay, the McKinsey Global Institute listed 74 anti-obesity tips. With similar rules of conduct, the disease could be stopped, but for now a long-lasting negative trend is more likely, especially since the disease is spreading more and more in poorer countries. According to the latest United Nations report on the world nutrition situation, Mexico has the highest percentage of overweight people. Against this background, businesses developed around adiposity will most likely continue to grow. 

 

Health sector a main beneficiary  

Investment opportunities can first of all be found in the healthcare sector. The costs incurred in the health system, in relation to the consumption of animal fats, are likely to nearly double by 2018 in the United States.  

One company, Zafgen (Ticker: ZFGN), is working on a drug to combat obesity through the conversion of fat into energy. Thanks to the progress made recently in research, the stock price of that U.S. bio-pharmaceutical company, which was listed only last year, has doubled since October. Currently it trades at around $39, but analysts on average value it at $54.86. However, in addition to the opportunities, investors should also be aware of the high risks involved, since approval of the drug is not guaranteed.  

The risks are demonstrated by the fate of Vivus (VVUS). Although this industry pioneer has already developed an obesity drug, the stock price has nevertheless crashed, since the costs for the drug are hardly reimbursed by health insurance plans. 

Investors who prefer a little less risk might instead bet on the major representatives from the pharmaceutical sector. AstraZeneca (AZN), for example, receives from Bank of America Merrill Lynch the full 100 points on the question of to which extent an industry member is classified as a beneficiary of the obesity topic.  

The British-Swedish bio-pharmaceutical company currently struggles operationally with a few difficulties, but the valuation compared to the sector is reasonable and the stock price moves within a long-term upward trend. In addition, the stock attracts with an estimated dividend yield of 4.2 percent. 

 

Healthy eating is just as important  

The topic of obesity will also have a strong influence in the coming years in the areas of diet and lifestyle. Even if the number of overweight people increases, more and more people will try hard to keep a slender figure and therefore consume healthy food and dietary supplements, or increasingly participate in sports in order to lose or keep weight. 

With regard to healthy eating, the market research institute Euromonitor valued this segment in the prior year at $932 billion worldwide. This figure, which on average is connected with high profit margins, is expected to grow to $1.1 trillion by 2019. The trouble here, similar to that in the health sector, is that the valuations are often quite sophisticated.  

An alternative is fish farming, but because of the risk of disease in fish stocks, investors should not forget how volatile this business can be. Nevertheless, the Norwegian company Akva Group appears to be interesting. (Last year it acquired a large aquaculture farming services company). Backed by a record-high order backlog of 547 million Norwegian Krone (US$66.6 million), the executive board is optimistic for 2015. The prevailing optimism is also expressed by a resumed dividend payment, which on an unchanged level would mean a yield of 4 percent for 2015. The stock of the technology and service partner to the aquaculture industry, which can only be purchased on the stock market in Oslo, has a reasonable price earnings ratio of around 12 for the current year. 

 

An active lifestyle  

Optically not so inexpensive is the U.S. bio-nutrition specialist Sprouts Farmers Market (SFM), with a price-earnings-ratio of 28.4 for 2015.  

The company is benefiting from the trend toward organic food, which has emerged in a strong way in the fast-food-loving U.S. Growth opportunities seem likely given that the company currently has only 175 stores in 10 U.S. states. Based on this, analysts forecast earnings growth of around 20 percent per year for the next five years. 

A simple but proven method to maintain health is to drink water instead of soft drinks. In the foreseeable future, the water industry should be able to produce steady sales growth. An investment idea is the purchase of an Exchange-traded fund such as Guggenheim S&P Global Water ETF (CGW).  

To keep a portfolio fit, a stock such as Foot Locker (FL) is attractive. Within a highly valued sector, the U.S. retailer of athletic footwear and sportswear, with an estimated price-earnings-ratio of 17.5, still has a comparable moderate valuation. The outlook for its stock should be promising if analysts’ forecasts are right of yearly earnings growth of around 12 percent for the next five years. 

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