Motley Fool Hidden Gems Investing - Gas, China, Food & Beverage Stocks

Episode Date: December 8, 2022

Inflation is one of the big stories of the year, but consumers are finally getting relief at the pump. (0:21) Asit Sharma discusses: - The price of gas being lower than it was a year ago - Ripple effects (positive and negative) from lower gas prices - China stocks getting a short-term boost from the prospects of Covid restrictions being relaxed (9:45) Ricky Mulvey joins Asit to take a closer look at which food and beverage trends are gaining (and losing) steam. Stocks mentioned: BILI, JD, BYND, KO, SAM, KR Holiday Music: Christmas (Baby Please Come Home) by Dropkick Murphys Host: Chris Hill Guests: Asit Sharma Producer: Ricky Mulvey Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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I'm Chris Hill. Joining me today, Motley Fool Senior Analyst Asit Sharma. Thanks for being here. Chris, I appreciate you having me. I think it's fair to say that inflation has been one of, if not the top big macro stories of 2022. And yet, it seems like we're ending the year on a positive note in this regard. The price of a gallon of gasoline is now lower than it was a year ago. Now, obviously, between last December and right now, it's spiked to more than $5 a gallon. But today, the national average is $3.33 for a gallon of gas. There are some who think slash expect it can go below $3 a gallon in early 2023. When you think about something like this, whether it goes below $3 a gallon or not, just lower

prices of gas. As an investor, what do you think in terms of ripple effects of this? Chris, I think there's good and bad when I look at where gas prices are going. I want to focus on the good, first of all, because there is something tremendously positive in this and that there's relief for consumers. So much of our economy depends on people getting into their cars and driving, whether you are a blue-collar executive or you're someone who works in a manufacturing plant, we all notice the gas price when it's going up. For some of us, it really impacts our ability to make ends meet. It eats into discretionary income that we might have. Whenever you have those wild swings where gas is heading towards

$5 a gallon, it has not only a real effect on our wallets, but it has a psychological effect and that has the first ripple effect that you refer to in the economy. This is very good news in that sense. What's the not so great news in this? I think part of this reflects that there's just decreased demand for oil in the economy. Now, silver lining to this is that it's a big component of inflation, as you mentioned. Maybe this is one of the signals that the Fed will look at and take a stance where they're easing off those big rate increases, perhaps leveling out. If things slow down further, could we be looking at a Fed retracement next year? Possibly. There is a silver lining to the not-so-happy aspect

of the economy slowing down, which is directly tied to interest rates. It's a murky picture right now as well, because we don't know if this is just a temporary lull or if the economy is getting into a persistent weaker state than it's been. So far, it's been running hot through the year. Inflation was the biggest headline of the year. Maybe the hot economy that wouldn't cool off was the third or fourth headline in sequence. I have to assume this goes in the plus column for small businesses, for any business that is dealing with transporting goods from point A to point B. Yeah, for sure. When you are in a position that you have to allocate your funds

as a small business, you have to keep squirreling away those budgetary reserves because you you don't know what the price of fuel is going to do, how that's going to affect your business. When it levels off, then you've got, just like a consumer, more room in the budget for the things that your business needs to do. The smaller level you get down to, the more mom and pop, the more it becomes about having capital to grow your business. A rise in fuel prices can affect your ability to expand. This has that bottoms-up effect on the economy. mom and pop businesses can start investing in expansion again, well, that's good for the rest of the economy as well. The other story that's getting some

attention today that I wanted to get your thoughts on, and this is to the extent that every large nation is always interested in the price of oil. Maybe there's a little bit of a connection here, but it's just the reports coming out of China of COVID restrictions being eased up and what that can mean for businesses there. We're seeing a bunch of China-based businesses, their shares popping today in what is otherwise a pretty dismal week for the market. When you see this type of news, what goes through your mind? Well, the first is what you just alluded to, that China itself is one of the global forces that has led to weakened oil demand as they've been locked up for months and months with their

policy response to COVID. I see what's going on with the easing of restrictions, and I think it it has an effect on both markets, but it also has some cautionary notes as well. We see pent-up demand for Chinese stocks, so investors think if they ease up on these tight COVID lockdowns, the manufacturing sector will get back on its feet, the Chinese economy will start to grow again, that's a net positive for Chinese stocks. Let's jump in. To this, have to say, hey, hey, hey, let's be a little cautious here. Unlike the U.S. and some other countries, in China, the regional governments don't really have the clearest line to what the CCP, the Chinese Communist Party, wants. They take directives, and then they try to

interpret those directives. So, even though there have been some guidelines that are now being established, it doesn't mean that the Chinese economy is going to be able to pivot again, if they open up and they start to see many COVID cases spike again, we could go back into lockdown. I'm not so convinced that this means that the Chinese economy has opened up and it's free and clear sailing from here. The other thing that occurs to me when you ask this question is, what about this increasingly firm grasp that Xi Jinping has on the Chinese economy? He single-handedly bought himself rights to be the ruler for life of China if he wants, and he's increasingly exercising a state-driven, directive-driven control over the entrepreneurial

bent of that economy, which was good for 9% annualized GDP growth for decades. Now, because of COVID, it's coming to a standstill. I'm curious what happens if we ever get out of the pandemic. Will the Chinese economy ever be able to resume its former growth, given that it's a more and more autocratic driven society? I wonder if they're losing their entrepreneurial bent. That's another reason, Chris, I say, wait a minute, I don't know if we should be popping back into Chinese stocks just now. Chris Hill will say upfront, I'm not someone who invests directly in China-based companies. I had the same reaction you did. I thought, boy, we're projecting a lot of optimism into the future

for a government that has shown a willingness to quickly change its mind when it comes to COVID restrictions. Yeah. And I should here give the counter argument to everything I just said, which is sure, but a billion people, a rising middle class, which now we see has some very pertinent challenges. It's not quite the story of this untrammeled path to middle-class wealth that it was a few years ago. But you've got a very large and active consumption economy, or at least one that's trying to transition into a consumption economy. And that's good for the major Chinese businesses, the ones that have already established a foothold pre this whole movement of the Chinese Communist Party to take more power out of the private

sector. So yeah, there is definitely a market there for these companies. Some patient investors will say, I'm willing to take that risk because I think at the end of the day, a Billy Billy or a JD.com is going to grow. Yeah, it'll be a volatile stock, but I'm in it for a decade or two. There is an argument there that this is still not a bad place to invest. I would just love for investors to be aware that there may be more risk there than it appears on the surface. Asit Sharma, always great talking to you. Thanks for being here. Thanks so much, Chris. Thanks. I really appreciate it. Asit is actually sticking around for a bit. Beyond Meat's cost of revenue is now greater

than its sales, which begs some questions about the future of fake meat. Asit joined Ricky Mulvey to talk about food and beverage trends, which ones are declining and which Asit, I was messing around with the GPT-3 chatbot, which is this artificial intelligence chatbot. You can ask it any question and it responds. For exactly one day, it was willing to talk about stocks with me. All of the analysts at The Motley Fool were very busy, so I asked it some questions about small caps. One of the small caps that it liked was Beyond Meat. I figured instead of arguing with an artificial intelligence chatbot, might as well bring you on to talk about food trends in Beyond Meat, because I disagree with

it. This is a company that's in a lot of trouble. I think there's a lot of questions about the trend of fake meat, and also what food and beverage trends really have some legs. Well, Ricky, first I want to say that I'm going to disappoint you because GPT-3 is a hell of a lot more interesting than I am. Have you messed around with it? I haven't messed around, but I think many people who are listening today will second me on this. It's very interesting just to open your Twitter feed and to read the reactions of people who've played around and read their screen shares. I don't even have to go and actually interact with I'm just reading what all the rest of you are tweeting out, your wild experiences with this artificial intelligence manifestation.

But yeah, let's talk beyond meat. And I want to, you know, for once, I want to take issue with something you said in our prep for this episode. And I so rarely take issue with anything you say, Ricky. But I think you referenced lab-grown meat. and hey maybe there's still a future for lab-grown meat because we should make this distinction right beyond meat is it's basically pea protein isolates and some other processed parts of food it's not really grown in a lab but i get what you're saying canola oil and you didn't even wait for me to say lab-grown meat before you disagreed with it you're just you're you're

coming out firing i came armed for this conversation you know when you're working through an outline and you're highlighting stuff with the yellow marker and telling yourself, uh-uh, I'm going to correct this right from the get-go. Sort of like that, Ricky. But that joking aside, this is a company that really has been on a tremendously negative trajectory. Going back to your thoughts about it, I mean, I think that one of the things as an investor, you want to figure out is what is the total market for this company? What's their share in it? Is there any upside from here? And I know you've got a hot take or two, so I'll ask for your thoughts and then I'll chime back in. Hot take number one is that while I understand

that there's a trend away from eating less meat is good for the planet, I think there's going to be the Turing test of, do you know if you're eating meat or lab-grown meat? I don't think in five years, that test will be completed. I don't think you'll be able to do the Pepsi-Coke challenge with lab-grown meat. I get alchemy vibes from it, that we can grow something in a lab. I'm going to use the lab-grown analogy, that we can create something in a lab that can replicate animal-based protein. And I think you're starting to see the experiment wear out because this was a rapidly growing company, but now sales are declining, which I think is some inflation. There's some inflation stuff, which is that a pound of ground beef is cheaper than a pound of

the Beyond Meat. But also, I think there's a taste issue. There's an article in the Wall Journal about Beyond Meat's troubles written by Jesse Newman. He pointed out that in the 12 weeks that ended in October 8th, Beyond Meat's sales have declined by 21% versus a year ago. This is also a company now that's rapidly innovating, trying to grow. I get it. But the cost of revenue is now larger than the volume of sales. Yeah. On that last point, this company, if you put this on a chart, has one of the weirdest gross margin curves you'll ever see. So this huge spike during the pandemic, all the way down to negative gross margin as they grapple with inventory issues, have to terminate co-marketing agreements, just a ton of stuff

going above the line. So that gives you maybe some indication of the problems they're facing in terms of current supply. But I want to go back to this larger point that you made earlier, which is, what about the demand curve for this product? Beyond Meat always said that competition is good in our industry. They looked at the total meat industry as their market, so that's well over a trillion bucks annually. But in this last conference call, management was saying, hey, actually, now with the economy in such a tight spot and inflation so high, not only are we seeing this trade-down pressure from people wanting to have these cheaper proteins that you mentioned, Ricky, but we're also seeing competitive pressures, which, come to think of it, yeah,

competition is something we've got to worry about. They've got competition from other providers of alternative meat because, I think you've put your finger on it, their product isn't so special and unique that you taste it once and that's the only kind of protein you want to have from now on. I want to say this as well, as someone who has transitioned to being a pescatarian over the last three years, I was an avid eater of traditional meat sources. I still eat fish, but more or less my diet's become very vegetarian. Maybe someone who's done the same will sympathize with this, but I think there's an enzymatic change that goes on in your body as you become more of a plant eater. You stop missing a rare steak. It takes some time.

That's not to say that when my neighbor is grilling steaks, I don't smell it. I walk in the door and I'm like, wow, that smells good. But I think that there is part of this investment thesis that is posited on people craving an alternative source of meat. And I don't think that's really what vegetarians are after. Now, I don't know. I'm a recent convert to vegetarianism or pescatarianism. But if people really don't have this overriding demand for a meat alternative, then it's not necessarily a commodity, but it's not so special either that it deserves a premium pricing in the marketplace. If they don't have a premium price, what is going to happen at cost of goods sold? How will they ever write that so that they can

have some positive money flowing to the bottom line? The liver kinks told me something very different about animal-based diets. I think that is, touching on an earlier point, though, that's what the market's starting to learn, or that I'm starting to think, is that this landscape for fake meat might be too competitive to really build a moat, or you don't know who has one, especially in this early adoption phase. I want to talk about some food trends, though, not just fake meat, but let's talk about some food trends with legs. Because one of the ones that I think, it's a little more boring, but it's that Gen Z doesn't love the alcohol. University of Michigan study found that

between 2002 and 2018, the number of adults, college-age people, who abstained from alcohol increased from 20% to 28%. It does appear from some research that a lot of those trends are holding over through the pandemic. How are you seeing this theme play out among the food and beverage makers? I think it's difficult because part of the alcohol industry is just based on this steady state demand for alcoholic beverages. So if you have one of the youngest demographics, not eschewing alcohol altogether but saying we want lighter drinks we don't want to drink as much well that has to factor in how you brand your products how you package your products what type of products you offer and there are some companies that have been very adept at this over the years

like the boston beer company has been able to shift from just craft beer into hard seltzers but every change that is wrought by the new generation, as the preference for alcohol also becomes more specialized, makes it harder on any given company to keep its position in the marketplace. For years and years and decades and decades, we had one type of beer, maybe two types of beer. We had a working-class beer and then something different. That lasted probably all the way until the early 90s before we've had an explosion in preferences and craft beers, which has utterly fragmented the beer market. So I think this just makes it difficult if you're not one of two things, either a multinational conglomerate with lots of brands

in your arsenals, or a small craft company that can find its audience, make good money, live a nice lifestyle off of those profits, and doing what you love, which is maybe to to find that next great expression of an IPA. Or your Coca-Cola, which for the longest time said, we don't do alcoholic beverages. And then in the past couple of years, oh, growth is also cool. Yeah. So it seemed surprising at the time. It's been a few years now since Coca-Cola announced that they were going to get into this business, not really directly, but through licensing and letting other players use its trademarks to introduce alcoholic beverages. Jack Daniel's comes to mind. There's also the

Topo Chico hard seltzer that they're introducing. I think this goes back to that power of being the global multinational, that you can experiment with these beverages. You can lift and shift. As long as you do it in a tasteful manner, it's not going to kill your brand. Coca-Cola's advantage is that it's got such great penetration in so many wealthy countries. They can experiment in Japan if it wants for two years before then taking that product maybe to South America or to the U.S. or Europe and vice versa. So they have all method of distribution once they decide where they really want to spend their money and time and resources into cracking the alcoholic market. But in the meantime, they just keep trucking along because another trend we've seen, Ricky, is that people really haven't stopped drinking as much soda. We've just maybe dialed

down the soda size, and that's more profitable for the Coke and Pepsis and Dr. Pepper Keurigs of the world. And as we wrap up, besides the lower alcohol consumption of younger generations, besides the fake meat, any other food beverage trends that you think are long-lasting? So in opposition to everything I've just said over the last several minutes, we're still loving healthy beverages, healthy drinks. It's just, I don't know, there's like a flavor of the day. It seems every year there's a new fad. Decaffeinated drinks, energy drinks that aren't harmful for you, lower sugar drinks, bubble tea. This year's flavor seems to be fermented beverages because the pandemic taught us that we need to try to keep

our immune systems healthy. We need good probiotic gut health. So you see this explosion in kombucha and other beverages on the grocery store shelves. That seems like something we're never going to give up, the never-dying quest to drink a healthier beverage because I had a soda yesterday. What about you, Ricky? I think it's the eat at home, and especially those close to ready-made meals. Kroger had it with Home Chef. I think now it's doing about $1 billion in sales a year. But interesting to see how those trends continue to play out. Asit Sharma, always good talking to you. Same here, Ricky. Thanks a lot for having me.

As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening. Here's the Dropkick Murphys. We'll see you tomorrow. They're singing deck the halls But it's not like Christmas at all Cause I remember when you were here And all the fun we had last year

Pretty lights on the train I'm watching them shine You should be here with me Baby, please come home