Buy Bacon? Changing Nutrition And Its Investment Effects - Bezek's Daily Briefing

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Includes: ADM, CALM, CORN, CVGW, DIA, IBA, JBSS, MKC, PF, PPC, QQQ, SAFM, SOYB, SPY, TSN, USO, WGHPY
by: Ian Bezek

Summary

The markets are calm heading into the weekend.

The revelation of new data from an influential nutrition experiment may upend popular thinking.

Which stocks will benefit, and what should be avoided as our understanding of nutrition evolves?

After Wednesday's big gains, the market didn't do much on Thursday. It was a textbook consolidation day, as the markets literally went sideways. The S&P 500 (NYSEARCA:SPY) and Nasdaq (NASDAQ:QQQ) both closed unchanged, while the Dow (NYSEARCA:DIA) eked out an 18-point win.

Oil (NYSEARCA:USO) was basically flat, and there wasn't a whole lot else going on either. After big gains earlier in the week, the international markets flattened out.

The markets appear very much to be in "wait and see" mode. With a big move in oil likely next week, and earnings season picking up pace, there will be action soon enough. But for now, things are quiet.

With that in mind, today's Briefing is devoted to a bigger-picture topic. How will changes in nutritional science and dogma affect the food industry going forward? For a sector that gets a lot of space in many conservative investors' portfolios, it's a tasty question indeed.

Fat Is Back

Source

There are few fields more controversial and widely debated than nutrition science. They advise not to bring up politics or religion on a first date. You could easily throw in nutrition as well - a conversation about paleo diets or veganism can derail an otherwise pleasant evening.

In recent years, there has been a broad shift in the direction of the field. The previous generation held a generally pro-carbohydrate and anti-fat view of the world. Cholesterol was held to be the big evil; heart disease was soaring, and it was people's love of red meat, dairy products, and fatty dishes that was thought to be leading the way.

This was an era that demonized the common egg - yolks were to be worried about. A huge move toward chicken, turkey, and other leaner meats ensued, along with low-fat, higher-sugar, plant-based foods.

But those conclusions have come under increasing fire in recent years. The evidence linking cholesterol to heart disease has been significantly weakened. Red meat's reputation is slowly starting to recover. Eggs have gotten themselves largely off the naughty list.

While saturated fat remains a questionable ingredient for many people, another trend has picked up steam - there's been a move to ban trans fats and cut down on artificial fat substitutes. While butter was under fire, people are now wondering if the replacement - margarine - is worse than the original sin.

In any case, this trend back toward animal fats and away from the previous generation of "healthier" artificial foods is about to make another big leap.

On Tuesday, results of an extensive nutritional study were published an astonishing 40 years after the survey was completed. According to the Washington Post:

The fuller results appeared Tuesday in BMJ, a medical journal, featuring some never-before-published data. Collectively, the fuller results undermine the conventional wisdom regarding dietary fat that has persisted for decades and is still enshrined in influential publications such as the U.S. government's Dietary Guidelines for Americans.

The study was carried out with institutionalized patients in Minnesota. The researchers fed the group two different diets. One followed the standard American diet, while the other was fed a low-fat diet aimed at lowering cholesterol levels and controlling heart disease. The article continues...:

Just as researchers expected, the special diet reduced blood cholesterol in patients. And while the special diet didn't seem to have any effect on heart disease, researchers said they suspected that a benefit would have appeared if the experiment had gone on longer.

There was "a favorable trend," they wrote, for younger patients. Today, the principles of that special diet - less saturated fat, more vegetable oils - are recommended by the Dietary Guidelines for Americans, the government's official diet advice book.

The trial's early results were turned into gospel. That "favorable trend" was good enough to influence the American diet for decades. Doctors and nutritionists would advocate a similarly low-fat, higher-carb diet, based in good part on the results of the Minnesota experiment.

However, there was more to the story. The full data of the experiment, finally released this week, show that the recommended advice was, in fact, probably mistaken. The survey would go on to show the opposite result, as the article continued...:

Yet the fuller accounting of the Minnesota data indicates that the advice is, at best, unsupported by the massive trial. In fact, it appears to show just the opposite: Patients who lowered their cholesterol, presumably because of the special diet, actually suffered more heart-related deaths than those who did not.

Before you rush out to buy a pound of bacon and eat it in one sitting, do be aware that nutrition science remains complex. We can't definitively say higher-fat, lower-carb diets are the way to go. But the evidence continues to lean toward meat and dairy products being relatively healthful. The recent advice advising great caution regarding sugar intake will find more support in the wake of this new information.

Investing Implications Of The Nutritional Shift

For investors, the overall trend in nutrition is probably, on net, not helpful. Commodity food products don't make a lot of money. There's not a great deal of profit to be had selling non-branded fruits and vegetables. Meat and dairy may be somewhat more profitable, but they aren't big profit centers.

Big Food has been making money selling people substitutes for old foods that have been demonized. Instead of salad dressings using normal oil, you get a no-fat salad dressing involving a lot of sugar and chemicals that can be sold at a high price. A reluctant customer, seeing the "heart-healthy" claim, pays up.

Or take something like Smart Balance. It was a key part of Boulder Brands' (formerly BDBD) strategy. Already, doubt was seeping in - perhaps the best butter-like substance was, in fact, humble old 100% cow's milk butter after all. Boulder Brands stock plunged as its butter substitute lost interest, before finally getting taken over by Pinnacle Foods (NYSE:PF) recently.

A lot of these alternative and supposedly healthier products are both more expensive and (generally thought to be) less tasty than the original products they replaced. Few people switched to cooking in canola oil because they thought it tasted better than pork fat, for example. But the nutrition gurus said to avoid lard, so a market opportunity opened.

Many of these new product areas will likely diminish in size. I'd be very wary of owning companies whose reason for existence is in offering a "healthier" alternative to a traditional food product. Current nutritional trends bode very poorly for these sorts of fad products.

On the upside, there are some ways to play the reemerging trend toward fat consumption. The easiest way is through commodity producers in the space. In eggs, for example, you have Cal-Maine Foods (NASDAQ:CALM) and Mexican firm Bachoco (NYSE:IBA).

If sugar replaces fat as the primary dietary evil of the next generation, as appears increasingly likely, you'll see things like omelets make a huge return to fashion.

Meat producers also stand to see large market expansion. WH Group (OTCPK:WGHPY), which bought out American giant Smithfield Foods, is one clear play. Among meat-focused producers still listed on a major US exchange, Sanderson Farms (NASDAQ:SAFM), Tyson Foods (NYSE:TSN), and Pilgrim's Pride (NYSE:PPC) all come to mind.

If more calorie consumption is to come from meat and dairy rather than grains and sugars going forward, this will also offer huge upside for the grain farming industry. This may sound counterintuitive. However, since meat requires far more calories in per calories of food produced - it's much less efficient - a more meat-based human food supply will markedly boost corn (NYSEARCA:CORN) and soybean (NYSEARCA:SOYB) demand. This could be good news for companies like Archer-Daniels Midland (NYSE:ADM).

A more fat-filled diet helps a few specialty companies. Among them would be those such as producers of high-fat healthy natural foods. Avocado distributor Calavo Growers (NASDAQ:CVGW) and nut producers such as John B. Sanfilippo (NASDAQ:JBSS) come to mind.

Finally, the more general trend toward natural rather than processed foods helps one other firm in particular: McCormick & Co. (NYSE:MKC), the spice and flavors giant, stands to benefit greatly if current nutritional and cooking trends continue.

Disclosure: I am/we are long MKC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.