How To Bet On Nutritional Habits In China And Elsewhere

Includes: HLF, MCD
by: Fred Piard

This article justifies the presence of McDonald's Corporation (NYSE:MCD) and Herbalife Ltd. (NYSE:HLF) in a long-term portfolio, irrespective of the news. Each position is based on a double bet.

McDonald's is a bet on a hurried, low-cost lifestyle in developed countries. It is also a bet on an emerging global middle class, which is avid to adopt so-called "first-world" habits and products. Herbalife is a bet on the worldwide pandemic of obesity and overweight, and on the development of nutritional supplements.

About McDonald's

There are many articles out there on McDonald's fundamentals. I will just recall the strategic points. McDonald's is not only a food company, but also a real-estate company and a marketing company. It is such a symbol throughout world that the Big Mac's price is used by travelers and economists to evaluate the cost of living in a country. Although its products may be questionable for health, what is attractive for an investor is the combination of real assets, strong management, robust dividend, a business model that allows to outsource risks and costs (franchise), and a distribution based on loyal consumers.

In 2008-2009, it was one of the most resistant stocks in all categories (drawdown 25%). It began the second half of 2012 with a 12% drawdown and a support at $86.3. McDonald's has widely outperformed the market for more than 40 years. Having significantly underperformed the S&P 500 benchmark for months without really bad news, it becomes even more attractive. The most promising market for fast food companies is China. McDonald's China plans to open a new store every day for the next four years.

About Herbalife

Fundamental analyses of Herbalife can also be found in various other articles. Once again, I will just focus on strategic points. At the opposite end of McDonald's in terms of company size and products, Herbalife shares in fact most of the previous points—a strong management, increasing real assets (integration of production units), a business model that allows outsourcing risks and costs (direct selling), and a distribution model based on loyal consumers. This is not a high-dividend stock, but a yield above 2% is significant in a low rate context.

Taking into account a split in 2011, the share price was multiplied by 10 from December 2004 to April 2012. Then it fell on fears about a short selling raid. Another common point with McDonald's that Herbalife shares is that it has recently underperformed the S&P 500 benchmark with good fundamental data and no really bad news (alpha -27% in May+June). A support has been set at $42.4. One of the most promising market for the company is China too. The net sales of Herbalife in China grew +14% annually from 2010 to 2011 (+26.3% worldwide), and +24.5% quarterly from Q1 2011 to Q1 2012 (+21.2% worldwide). Herbalife Regional Metrics can be found here.


The World Health Organization (WHO) has published for years evidence of the correlation between nutritional habits and obesity, but few governments really care about nutritional education. In 2010, 38% of the Chinese population was overweight and the ratio is expected to climb to 2/3. As long as people continue to eat quick and cheap, and as long as the emerging global middle class continues to look for a supposed developed lifestyle, fast food and overweight will grow.

Leading fast food and weight control companies, McDonald's and Herbalife, are well-positioned to grow with modern nutritional habits worldwide, and especially in the most promising market: China. These positions are justified by qualitative arguments. However, the main part of my stock portfolio is built on quantitative strategies (you can find my methodology here).

Disclosure: I am long MCD, HLF.