Billionaires have long capitalized on Americans’ penchant for convenient snacks and guilty pleasures, with stocks that provide a consumable dopamine hit making up a big part of the portfolios of everyone from Warren Buffett to Bill Gates to Ray Dalio.
While it’s easy to chalk up the rise in soda and fast-food stocks to unhealthy consumer habits that may be threatened by the latest weight-loss drug, analysts say diversifying these brands into healthier options could help them survive in the Ozempic-era future.
Warren Buffett is the epitome of a patriotic food investor. The 93-year-old is known for loving McDonald’s and Coca-Cola and often serving products from both companies at meetings. Buffett has investments in both companies through Berkshire Hathaway or its subsidiaries.
The Bill & Melinda Gates Foundation has a similar investment strategy, although the tech titan has famously marveled at Buffett’s eating habits. The foundation’s first-quarter 2024 filing shows it holds $604 million in Coca-Cola stock and nearly $97 million in Kraft Heinz, maker of Kraft Macaroni & Cheese and Jell-O.
Ray Dalio’s Bridgewater Associates also has large investments in Coca-Cola, PepsiCo and Starbucks.
But these sweets stocks haven’t performed in line with the broader market in recent years: As of this writing, the S&P 500 is up 83% over the past five years, while Coca-Cola and McDonald’s are up 20%, and PepsiCo is up about 30%.
So why are these big-name portfolios hanging on to their stocks rather than investing in the broader market? The answer lies in the bad news, not the good news, says Filippo Falorni, lead analyst for U.S. beverages, household and personal care at Citi Research.
Falorni points out that McDonald’s stock remained relatively flat even during times like the 2008 financial crisis when the S&P 500 fell by roughly 40%. Similarly, Coca-Cola’s stock fell by 25% and the Nasdaq fell by 33%.
“Over the last five years, with a few exceptions (e.g., COVID-19), macroeconomic conditions have generally been very strong,” Falorni told Fortune. “If you look at the performance during the GFC, you’ll see that consumer staples stocks (Coca-Cola, PepsiCo, etc.) outperformed the S&P 500.”
With this in mind, it’s easy to argue that it’s not surprising that America’s billionaires invest in stocks, which they rely on in times of crisis.
But it also raises the question: why are affordable treat companies dominating the Fortune 500 and not so many giant salad brands?
Analysts who Fortune spoke to said it’s no coincidence that these companies quietly dominate Wall Street.
The reason these stocks are successful — and the reason they’re likely to continue to do well in the future — is because they’re trading apart from other hot names in the S&P 500.
What AI can’t replicate is the dopamine rush you get from that first sip of coffee in the morning, the feeling you get from biting into a burger after a long day at work, or the fizz you get from opening a can of soda.
Emerging markets offer huge growth opportunities
For Falorni, the appeal of today’s “sweet candy” stocks isn’t where the companies grew from, but where they’re going.
For example, in its 2022 report, Coca-Cola highlighted that in developed markets, only 32% of beverages are non-commercial, meaning tap water consumed at home. The rest of the market is alcohol, hot drinks and cold drinks such as bottled water and carbonated drinks.
This statistic is reversed in developing and emerging markets, where 69% of beverages consumed are tap water and only 16% of the market enjoys cold beverages.
Coupled with the fact that the populations of these countries are expected to grow faster than developed nations, it creates a huge opportunity.
PepsiCo, which makes a range of products from chips to soda, said sales rose 9% in emerging markets such as Mexico and Brazil, which now account for about 40% of the brand’s net sales, despite a decline in North American volume.
Similarly, Coca-Cola highlights that although its retail value in a region such as Latin America (approximately $120 billion) is smaller than North America (approximately $325 million), the number of consumers in the Latin American region is much larger (approximately 325 million versus approximately 530 million).
“If we can convert less than 1% of the population from non-commercial to commercial beverages every year, that’s a huge long-term boost,” Falorni explained.
Consumer Patriotism
Falorni agrees that there may be an element of “perception bias” among U.S. investors, but business fundamentals have a much bigger influence.
On this, he added: “These are very stable companies, in my view. To me, these are companies that have demonstrated over several decades that they can continue to grow regardless of the macro environment or changes in consumer preferences.”
But there’s a patriotic element to McDonald’s and KFC’s appeal to consumers, said Pat Chosik, senior portfolio strategist at Ned Davis Research.
While Chosik believes the consumer staples market as a whole hasn’t performed as well as others (on a total return basis over the past 30 years, the sector has returned 10.5% annually compared with 10.7% for the S&P 500), he told Fortune: “If you order some chicken nuggets at McDonald’s, open a Hershey’s chocolate bar and a can of Coke, and order a caramel macchiato at Starbucks, you know exactly what you’re getting.
“The United States has built many iconic brands and restaurants that have stood the test of time being sold around the world. Taste, convenience, product consistency and building brand image are key and I believe these are things that American food and beverage companies do particularly well.”
Has the Ozempic effect been exaggerated?
The biggest concern right now for the snack food and fast food giants is, of course, weight-loss drugs like Ozempic and Wegobee.
Fears that these drugs could suck billions of dollars of value out of the snack food industry are not unfounded: Big companies like Walmart, PepsiCo and Nestle are already briefing analysts about the impact GLP-1 could have on their businesses.
But while it’s easy to assume that companies traditionally selling unhealthy products are concerned about the drugs, analysts say they also open up whole new business areas.
“There’s a reason why staples are called food staples,” Chosik says. “There will always be demand for 1) meals, snacks, and drinks that are convenient and don’t take long to prepare, and 2) treats, indulgences, and self-indulgences that contain caffeine and sugar. I don’t see Ozempic or healthy alternatives disrupting those demand drivers.”
Falorni agrees, noting that there will always be some segment of society that wants to lose weight, and while more of this group may choose to take Ozempic in the future, that doesn’t mean more of the broader population will start taking the drug.
What’s more, a Citi study analysing 500 people taking GLP-1 drugs and 500 using other weight loss methods found little difference in intake.
In fact, when applied to the percentage of the total population expected to take GLP-1 in the coming decades, the difference is very small, with the resulting decline in consumption being around 1 percentage point per year.
This factor, combined with the fact that some users may not want to undergo treatment through injections, has led analysts to approach the phenomenon with little hesitation.
