Investors have been intrigued by a fairly new class of drugs for diabetes and weight loss called GLP-1 medications, including Novo Nordisk’s Ozempic® and Eli Lilly’s Mounjaro®, which has coincided with stock declines for some makers of packaged foods and beverages—an overreaction that has created a value opportunity for longer-term investors, according to Fidelity Portfolio Manager Sean Gavin.
“The market has become hugely concerned that the ‘Ozempic effect’ will cause demand for processed food to meaningfully decline over the long term,” says Gavin, who manages Fidelity® Value Discovery Fund (FVDFX). “But I think this is an overly pessimistic view, and I’ve sought to capitalize on the recent sell-off by adding certain food and beverage stocks to the portfolio.”
In helming the large-cap, value-oriented strategy since 2012, Gavin invests in companies when he sees significant price dislocation, believing that a stock’s current market value will move toward its intrinsic (fair) value over time.
Gavin estimates that the broader market, based on recent stock-price moves, is assuming that 50 to 60 million Americans will eventually be on GLP-1 medication for diabetes and/or obesity. But he also suggests the market may be overlooking the substantial side effects of these drugs, which require regular self-injections.
“These are miracle drugs for some individuals but have real side effects for others, and some folks simply may not stay on them,” he explains, pointing out that people are cycling off these drugs after 18 months, on average, even as the market’s behavior seems to suggest they’ll stay on them essentially forever.
Gavin’s research suggests that these drugs will cut into the growth of certain food and beverage companies by one percent or less, yet the market has punished their stocks to a much greater degree.
For example, he found Coca-Cola (KO) to be a compelling value and established a meaningful overweight position in October. Gavin thinks the market has overstated the financial impact of GLP-1 medication on the beverage company’s bottom line, especially since its traditional U.S. soda business is becoming less significant to the firm’s earnings outlook.
“About 70% of Coca-Cola’s earnings now come from outside the U.S., and the company has diversified its business to include many beverage types that would likely be less vulnerable to a shift in consumer behavior brought about by new medication,” he explains. “Yet, the company’s valuation drop does not seem to be reflecting this.”
Similarly, Gavin initiated a stake in Lamb Weston Holdings (LW), a maker of frozen french fries, when its stock price was well off its high. He likes the company’s willingness to reinvest in its business and significant potential for profit-margin growth, as well its ability to successfully handle the surprisingly complex business of french fry distribution.
Although Ozempic and other drugs may ultimately limit demand for tasty, often-unhealthy food and beverages, Gavin thinks the impact on these companies is likely to be limited.
“I have no doubt that use of these drugs will dramatically grow, and I hope that the health of America gets better,” says Gavin. “But many consumers have strong loyalty to their beverage preferences, and french fries taste good, so I’m confident that people are going to continue to want them.”
For specific fund information, including full holdings, please click on the fund trading symbol above. Securities mentioned were fund holdings as of January 31.
Sean Gavin is a portfolio manager in the Equity division at Fidelity Investments.
In this role, Mr. Gavin manages Fidelity Value Discovery Fund, Fidelity Blue Chip Value Fund, Fidelity Blue Chip Value ETF, Fidelity Advisor Equity Value Fund, Fidelity Advisor Value Leaders Fund, Fidelity Series Value Discovery Fund, and FIAM Target Date Value Discovery Commingled Pool.
Prior to assuming his current position in January 2012, Mr. Gavin was a research analyst in the Equity division. During this time, he worked as a diversified analyst on the Value team, as a food and beverage analyst, and as a transportation analyst.
Before joining Fidelity in 2007, Mr. Gavin was an assistant portfolio manager at Pioneer Investments and a research analyst at both Boston Partners Asset Management and at Delphi Management. He has been in the financial industry since 1998.
Mr. Gavin earned his bachelor of arts degree in mathematics from Oberlin College and his bachelor of music degree in trombone performance from the Oberlin Conservatory. He is also a CFA® charterholder.