Investing In Zero-Calorie Sugar Substitutes May Fatten Investors' Wallets

Includes: ADM, KO, PEP, SNMX, STVF
by: Ang Nguyen

A new study out of Yale University published in the Journal of the American Medical Association, suggests that simple sugars-fructose and glucose-both affect the brain differently, and using imaging tests scientists discovered how the different simple sugars trigger changes in the brain. It turns out when consuming fructose the brain doesn't register the sensation of being full, and worse it can trigger brain changes that may lead to overeating, especially compared to glucose, which is found in cane sugar and sugar beets. The researchers looked for appetite-related changes in blood flow in the hypothalamic region of the brains of 20 healthy adults after consuming either glucose or fructose. When people drank the glucose beverage, levels of hormones that play a role in feeling full were high. In contrast, when participants drank a fructose beverage, results indicated smaller increases in hormones that are associated with sensation of being full. High fructose corn syrup (HFCS) has become common-place in the U.S. diet due to sweet beverages and processed food, and according to Dr. Jonathan Purnellan, endocrinologist at Oregon Health & Science University, who co-authored an editorial that accompanied the new study, "This increased intake of added sugar containing fructose over the past several decades has coincided with the rise in obesity in the population, and there is strong evidence from animal studies that this increased intake of fructose is playing a role in this phenomenon."

Dr. Louis Aronne, founder and director of the Comprehensive Weight Control Program at New York-Presbyterian Hospital/Weill Cornell Medical Center in New York City, commented that the growing body of evidence is pointing toward the hypothalamic brain region as having a role in obesity. He noted, "Things as subtle as a change in sweetener can have an impact on how full somebody feels, and could lead to an increase in calorie intake and an increasing pattern in obesity seen in this country." Basically, he's saying that people should choose the sweetener with the least negative effects on their brain and body. Unfortunately, healthier choices in sweeteners just don't have the taste that consumers are willing to accept. However, there are natural sugar substitutes on the market today and new sugar substitutes being tested and developed that may soon have the flavor, be it alone or in combination with a sugar, that the consumer will gladly accept. Below are companies testing new natural sugar substitutes that may one day compete in the $56 billion global sweetener market.

PEPSICO (NYSE:PEP) the bottling giant based in Purchase, NY has been testing new zero- and low-calorie sweeteners to add to its products-and late last year rolled out a stevia sugar blend cola in Australia with 30% fewer calories than regular Pepsi--Pepsi Next. Interestingly, in the U.S. Pepsi Next uses a mix of artificial sweeteners and high fructose corn syrup instead of stevia. Both Pepsi and its rival Coca Cola (NYSE:KO) are looking for what is termed the "sweet spot": a soft drink with no calories, no artificial sweeteners, and no undesirable aftertaste. And though the odds may favor that stevia will be a promising alternative to sugar and part of the new breed of low-calorie and zero-calorie beverages, stevia still has a lingering aftertaste, which may be one of the reasons that Pepsi has not added it to its Pepsi Next in the U.S. However Pepsi, like Coke, dedicated a production line at one of its plants strictly to test alternative new beverages, and is continuing to develop alternative sweeteners as an answer to the decline of sugary beverage sales (due in part to the negative press about the amount of HFCF in sodas). In 2010, Pepsi entered into a $62 million, four-year deal with Senomyx, Inc. (NASDAQ:SNMX), a San Diego-based food flavor company, with a goal to develop natural sweeteners and "taste enhancers" designed to intensify sweetness, thus being able to cut the sugar content in its products. But Coke had an eight-year contract with Senomyx previously and, as of the date of this article's publishing; neither Pepsi nor Coke has produced any products for commercial use with its partnership.

One future natural low-calorie sweetener that Pepsi's Quaker Oats division is testing is derived from oats. Similar to brown rice syrup (with comparable binding properties), the sweetener is made from hydrolyzing oats with an enzyme creating a modified flour that is then dried to create a potent natural sweetener that could be used in both food and beverage products; it appears as though it's best geared toward grain-based products however. Pepsi is not the first company to utilize oats as a sweetener. Oat Tech, Inc., a little start- up company recently launched OatSweet, a natural sugar substitute that has a lower caloric count than sugar and can be found in liquid form on market shelves. Pepsi is a $108 billion market cap company with brands that include Pepsi, Frito-Lay, Quaker Foods, Tropicana, and Aquafina. Late last year in a report by ETF Channel, it named PepsiCo as a top 25 "dividend giant", stating a strong quarterly dividend history with favorable long-term multi-year growth rates in key fundamental data points. The dividend is $2.15 per share, paid in quarterly installments. For stability and a great dividend, Pepsi is a great company to have in one's long term investment portfolio.

Archer Daniels Midland Company (NYSE:ADM), the global food processing giant out of Decatur, IL is a major supplier of the sugar substitute sorbitol touting 1/3 the calories of sugar and 60% as sweet. It's made from a derivative of corn alcohol and is found naturally in a variety of fruits and berries. Commercially it is made by the hydrogenation of glucose and is available in both liquid and crystalline form and can be found in sweetened products from chewing gum to soft candies. Sorbitol is slowly absorbed in the body and low on the glycemic index, making it a good sugar substitute for diabetics. But at this time, sorbitol really has not gained much in popularity, and the large beverage manufacturers have not shown much interest in adding the product to its reduced-calorie lines, probably due to the not-so-pleasant side effects that some encounter - a laxative effect-and it is not recommended for consumption by children and those with sensitive digestion symptoms or a gastro-intestinal condition such as Irritable Bowel Syndrome. That may be why ADM is hedging its low-calorie bet when it began to work with farmers in Paraguay to grow stevia by assisting them with economic support through firm marketing pricing, securing loans, and buying the harvested crop. ADM, in developing its stevia model with the farmers in Paraguay, expects to be able to replicate the process in other countries as it develops its stevia product to add to its pipeline.

ADM has a market cap of $17.12 billion, and year over year the stock has been idling in neutral, ending the year basically where it began; though in the first week of 2013 ADM found its stock up 5%. Analysts at Miller Tabak, in a research note to investors on January 2nd, upgraded ADM from a hold to a buy rating, and raised its target price from $26.00 per share to $34.00. Analysts at BMO Capital Markets on December 6th upgraded ADM to an "outperform." However on the same date, JPMorgan Chase in a research report issued an underweight rating and a $28.00 per share price, sighting "ADM's North American capacity (67% of total) is likely to remain under pressure for the foreseeable future as a result of the Midwest drought and the resulting lack of supply of crops." On Friday, January 11th analysts at "The Street" restated its hold rating. I like ADM over the long haul, it is a good solid company with a large pipeline of products used by the masses, and I see the company as a hold with a buy on the dips.

Stevia First Corp. (OTCQB:STVF), a small agricultural biotechnology company based out of Yuba City, CA, is focused on developing a high-grade stevia product that is cost effective and has the sweet flavor to meet the demands of the food and beverage industry. STVF is doing so by developing an industrial-sized microbial- based fermentation process to produce steviol and steviol glycosides (the sweet-tasting components in stevia leaf extracts), and expects the strains to yield initial production of steviol glycosides or related derivatives beginning in the first half of 2013. The process, which does not necessarily require the actual plant to produce the sweet extracts, began with the mapping of the biochemical pathways of stevia leaves and then subsequent a microbial modification to develop a bacterial strain that can reliably and quickly produce the same sweet steviol glycosides found naturally in stevia leaf tissue. By doing this, the company can better control the characteristics and flavor profiles of the finished product glycosides, something difficult to do with cultivated tissue. Since that research has been completed and the technology licensed from its developer, Vineland Research and Innovation Centre as announced on August 29 of 2012, Stevia First Corp's promising fermentation process should be able to develop less expensive extracts derived from the numerous steviol glycosides, creating a sweet product while removing the lingering aftertaste far more successfully and consistently than developing the actual stevia plants. According to the company's recent SEC filings, if the research and development efforts are successful, the first revenues on sales of its California stevia extracts could occur in 2014. The company also plans to initiate testing on its line of consumer stevia products, including a table top sweetener in the first half of 2013 with a goal (if tests are successful) to release its product in the second half of 2013 in order to begin generating revenue. Since the company has yet to produce its own stevia product, it intends to utilize stevia extract purchased from external suppliers until its own stevia production is operational. This should help to build its customer base while still putting the finishing touches on its production processes, both the fermentation-based and traditionally-cultivated products.

Stevia First Corporation has a market cap of $20.46 million. Last October STVF finalized its $500,000 in funding for R&D and general corporative purposes. Although a dilutive financing, the subsequent price drop may have created an even better entry price for new investors. On Friday January 17th STVF stock closed at $0.63 on heavy volume, with obvious interest returning to the company's shares. What makes this company interesting is that it is developing stevia that is now in high demand even with its flaw of a lingering aftertaste. Now if the company can actually create a better stevia extract through its fermentation process it would have a great chance of being that longshot that pays off big. However, STVF is in the development stage and at this time is generating no revenue, which means that the company's stock can move greatly on news, positive or negative. I do like that the company has released dates, though not exact, on when it expects its stevia production to commence.

There is a need for a natural zero-calorie substitute for sugar, and there are companies that are developing these much-needed products. It does seem at this time stevia is the clear choice as a sugar substitutes and continues to have a tremendous growth potential over the next few years. Stevia is an exceptional aid in weight loss and weight management because it contains no calories and reduces one's craving for sweets and fatty foods; and preliminary research data indicates that stevia may actually reset the hunger mechanism in people where the pathway between the hypothalamus and the stomach has become disrupted. So investing in companies that are also investing in stevia may to be a smart bet. PepsiCo, Coke, and ADM are all solid and safe companies, and stevia will only enhance their product lines and income. However, for those looking for high risk/reward investing in a stevia development company, Stevia First may be worth a look. But, caution is advised: Nanocap stocks can be volatile; they offer huge upside potential and the obvious downside risks. The three companies summarized above offer good current-level entries for various levels of risk. With no known catalysts imminent, investors are advised to pick solid entry positions for potential long term investment gains.

Disclosure: I am long SNMX, OTCQB:STVF. 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.

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