Value Investor Daily #7

How Weight Loss Drugs Will Affect Everything, Finding the Highest Quality Companies, 2024 Predictions

In Today's Edition:

Happy New Year! We’ve got a lot of gems for you today. We’ll look at what’s in store for value investors and markets in 2024. Let’s dive in!

How Weight-Loss Drugs Will Affect Stocks in 2024

The rise in popularity of GLP-1 weight-loss drugs like Ozempic is set to impact the stock market significantly. The long-term effects of these drugs could affect various sectors in the equities and economy.

Companies that produce these drugs, such as Novo Nordisk and Eli Lilly, are already seeing their stocks surge. Novo Nordisk, for example, has become Europe's largest company, while Eli Lilly is now the ninth largest company in the S&P 500.

Walmart (WMT) reported that users of the drugs were spending less on food.

Morgan Stanely’s survey of GLP-1 users reported consuming 20-30% fewer calories.

As people eat less food and lose weight while taking these drugs, other companies will likely be affected. For example, shares of CPAP manufacturers, insulin delivery systems makers, and heart valve device manufacturers have all been impacted by the rise of GLP-1 drugs.

CPAP makers ResMed (RMD) and Quipt (QIPT) stocks are down 41% and 34%, respectively, from highs set in 2021.

Additionally, the widespread use of these drugs could affect the economy itself, leading to increased productivity and cost savings in the healthcare sector. Airlines could even end up spending less on fuel.

Just under 3% of the U.S. population were on the drugs in 2022, but that could grow up to 5x by 2030, a 32% annual growth rate.

If the expected changes are overblown, it could be worth taking a closer look at the affected stocks. We look at one such company, Pepsi (PEP), below.

Here’s a look at current Price/FCF multiples:

Novo Nordisk - 30x

Eli Lilly - 91x

Walmart - 13x

ResMed - 27x

Quipt - 5x

Pepsi - 19x

Ken Fisher’s 2024 S&P Projection

Billionaire Ken Fisher is predicting 2024 to be another good year for investors.

Fisher predicts moderate double-digit gains for the S&P 500, with early leadership from big growth stocks and a shift towards value stock leadership later in the year.

He draws parallels to the market performance in 1968 and anticipates the S&P 500 returning approximately 11-18%.

2024 is also an election year, with the S&P 500 climbing in 83.3% of such years. He expects a Republican, likely Donald Trump, to win the White House, with a Republican Senate and a Democratic-controlled House.

Fisher sees no major shock on the horizon that could derail the market, and therefore expects a good-to-great year for investors in 2024.

Stig & Clay on Finding Quality Companies

In this value-packed episode of the We Study Billionaires Podcast, Stig Brodersen and Clay Finck break down the topic of high-quality investing.

Finding high-quality companies with superstar management isn’t easy, and timing the purchase is even harder.

In the episode, they cover…

  • Handling Drawdowns: Consider how a significant stock drop, up to 50%, would affect your sentiment and commitment to the investment.

  • Why Quality: How to focus on high-quality businesses. Only a small percentage of stocks significantly outperform government bonds, emphasizing the need for careful selection.

  • Competition and Management: Seek companies with minimal competition and management teams with a vested interest in the company's success, with a significant personal investment in the stock, bought via market purchases, not granted via stock options ideally.

  • Long-term Perspective: Adopt a long-term outlook, considering the company's potential for growth and capital requirements over several years rather than short-term price or performance fluctuations.

  • Valuation and Returns: How to understand the historical performance and valuations of the stock to gauge potential future returns, emphasizing the importance of a company's return on invested capital and the power of compounding.

And so much more. You can see all the show notes, including the full transcript, here.

The Evolution of 2024 Earnings Estimates

They say, “Stocks follow earnings.” But actually, stocks discount future earnings. So you could say, “Stocks follow earnings estimates”. 

But of course, and almost by definition, estimates are wrong and have to be adjusted constantly, which somewhat explains stock fluctuations.

In fact, as Zacks recently showed, 80% of the time, S&P 500 companies beat their quarterly EPS estimates.

In the aggregate, on average, companies tend to downplay earnings to show consistent outperformance vs. constant underperformance. They’re “delivering more than promised.”

So, how are 2024 and 2025 S&P 500 estimates shaping up? They’re starting to rebound.

Analysts now expect 11.6% total EPS growth in 2024 and 12.1% in 2025. Aggregate 2024 net income estimates have gone up in the last month from 2,094 billion to 2104.8 billion.

Read the rest of the Zacks article to better understand the cat-and-mouse game of Wall Street earnings estimates. It’s a great game and actually creates amazing opportunities for value investors all the time.

Barron’s thinks Pepsi could rebound in 2024

Pepsi: Buy The Fear

Over the past year, Pepsi's (PEP) stock has decreased by 3%, while the S&P 500 has seen an increase of 24%. Barron's suggests that the impact of the "Ozempic effect" may already be reflected in the stock's price.

Only 1% of the population was on Ozempic in 2022, so the overall financial impact on Pepsi could prove to be minor.

Frito-Lay, PepsiCo's snack-food franchise, which includes popular brands such as Doritos and Lay's, accounts for over half of the company's profits. This makes Pepsi less reliant on sugary soda compared to Coca-Cola.

Pepsi is confident that weight-loss drugs will not significantly reduce snacking, and has projected per-share earnings growth at the top of its high-single digit annual target for 2024.

The stock is trading at 19x cash flow. ROE was 43% in the last 12 months.

Predictions for the Future of the World in 2024

The Financial Times has made some bold predictions for the year ahead including:

Will Trump win re-election? No.

Will 2024 be hotter than 2023? Yes.

Will the Israel-Gaza conflict turn into WWIII? No.

And many more. Check out the rest of the list. It’s a great, short read to gain a global viewpoint of 2024.

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We’ve got so much planned for 2024. It’s sure to be an exciting year!

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