Motley Fool Hidden Gems Investing - Weight Loss. Weight Loss. Don’t Tell Me.

Starting point is 00:00:00 Are weight loss stocks losing too much weight? Looking for investments that can survive next month's fate? Finding the next wave of disruptors before they appreciate. Motley Fool money starts now, and you look great. I'm Rick Menards, and today I'm joined by fellow analysts Carl Thiel and Jason Hall with a look at what's eating at weight loss stocks this summer. We'll also take a look at some potential disruptors that could be hiding in plain sight. But first, wake me up when September ends. We enter the final trading week of August with renewed hopes for a Fed rate cut next month. However, the economy is still fuzzy, inflationary pressures are percolating, and the

Starting point is 00:00:43 stock market upticks keep coming. A lot can go wrong next month, but let's make this a September to remember. I know next month could prove challenging, but I want to go around the room to see if there's a company that you think can overcome any potential market obstacles in September and move higher. Let's start with you, Jason. I think a good way to decouple from U.S. interest rate policy is just leave the U.S. Let's talk about a company that sells primarily consumer staples in Mexico and has what I think is an exceptional and resilient business. That's Tienda Trace Bay in its native Spanish. I apologize to all the Spanish speakers for murdering the pronunciation there. It's BB Foods in its

Starting point is 00:01:21 corporate parlance. It's ticker TBBB. I've been following the business since our friend and colleague Tyler Crowe put it on my radar. It's been a couple of years ago since before it went public back in February 2024. I first bought shares this past January. BBB Foods is a very fast-growing operator of hard discount grocery stores in Mexico. It's a business that's pretty decoupled from most of the ongoing cross-border trade disputes with the U.S., U.S. monetary and trade policy. However, it has about $400 million in cash and equivalents. Most of that's in Mexican pesos, but a significant portion is still in U.S. dollars following the proceeds of its IPO in February in 2024. The U.S. dollars weakened a lot against the pesos. Money's now worth less

Starting point is 00:02:04 in buying power. The good thing for BBB Foods is that resilient, fast-growing business model is growing fast, and management's being savvy with how they're running it. Revenue was up 38% last quarter. 20% of that growth came from new locations they've opened. That means you have 18% of revenue growth that was left over from same-store sales. That's pretty incredible. It's opening stores at a fast rate of about $500 over the past four quarters, just past $3,000 total this quarter. Even at this pace of growth, management is being really savvy. The business is essentially running it right at breakeven. Now, that's a great change of pace for investors that are tired of high-growth companies with big losses, just hoping of

Starting point is 00:02:49 the you know finally getting to scale and things paying off i think bbb foods is compelling right now uh it's built to operate across economic cycles and really largely unaffected by u.s economic policy so jason i i know this is a small footprint model by which i mean that the size of the individual stores themselves but but for a a chain that has 3 000 stores um and uh you know in a business with notoriously low margins still running at break even just like how should investors think about how when this really scales and leverages and just how big it can get is there a u.s equivalent for this kind of chain not exactly not that's a publicly traded company that's easy to look at but other stores you can think about that are somewhat similar it's a little

Starting point is 00:03:36 bit similar like the aldi business model in a way smaller footprints really low prices that are really compelling and drive people in. Here's how these businesses win. You don't have to have giant margins to be profitable. As Bezos is famous for saying, your margin is my opportunity. The way that these business models work is by turning their inventory multiple, multiple times. And that way, even though you get those really small operating margins, those operating profit margins, two or 3%, if you're constantly turning your inventory, you can still build a really high return profitable business. In terms of scale, again, tiny footprint here. This is a business that can easily 5X, potentially even, they've talked about maybe 30,000 locations over the

Starting point is 00:04:20 long term. There's a tremendous opportunity. You have the tailwind of growth, economic growth in Mexico that's so important. And there's a lot of distributors, small retail businesses. You can think about in the US, actually, I think an interesting comp, like the auto zones of the world where you don't necessarily get super high margins. O'Reilly is another example. But you're just really good at what you do. You turn your inventory and you have a somewhat counter-cyclical business. And investors can get wonderful, wonderful returns over the long term. This may be kind of a hot take as summer finally starts to cool down. But thinking about an uncertain economy and some of the

Starting point is 00:04:58 pressures that we might be feeling, I'm looking at a part of the economy that is maybe a little less sensitive to economic activity and also happens to be pretty depressed right now. And I'm going to go with UnitedHealthcare. This is certainly a company that's had one problem after the next. It recently hit a five-year low. The problems include a criminal investigation by the DOJ. There's been a lot of management turnover. And certainly not unrelated to those first two things, they've had some really poor forecasting and management around their Medicare Advantage program, which is a pretty big part of the business. And it just has a very, very poor public perception right now. And all of which is to say that things could get worse

Starting point is 00:05:44 at the company. But there is a reason that Warren Buffett has been buying the stock to the tune of something like $1.6 billion in the second quarter. Michael Burry of big short fame has been buying. There are some other big names that are getting behind this. The fact is that this has become a pretty cheap stock. It's trading at a little under 19 times the current year's earnings projection, which might not sound super cheap, but that's already a very depressed number that's probably likely to come up again pretty quickly as we move into 2026. They continue to pay a dividend at the same time.

Starting point is 00:06:24 You know, this just remains a really powerful company at the center of the health care system. They're four hundred billion dollars in annual revenue, actually more than that. That's bigger than the GDP of many countries. It insures about one in six people in the U.S. It's not going anywhere. And while the DOJ investigation is serious, you know, past cases of Medicare Advantage billing investigations like this have always been resolved civilly rather than criminally. um which is not to say that uh there couldn't be some really large fines in the future but um you know i don't think it's an existential threat to the company in any way so you know bottom line

Starting point is 00:07:04 there's a lot of reasons for united healthcare to be volatile but they are really more specific to the company and i think a lot of shoes have kind of already dropped so while um you know the The economy, as we move into the later part of the year, could get a little more uncertain. I think UnitedHealthcare gets buffeted a lot less by that than many other companies would. Yeah, Carl, but sometimes, like in Imelda Marcos' shoe closet, there are more shoes to drop. Sometimes, cheap stocks get even cheaper. Is that a concern? Absolutely. There's certainly things that could happen. I would say, you know, the biggest unknown is probably around some of the investigations.

Starting point is 00:07:47 Not that it is all I think of the the the the Medicare fraud investigations around tenant health care from years and years ago that that, you know, ended up being this long term disruption. I don't think that's the case here. I think this looks a little different. A lot of Medicare Advantage stuff in the past, the courts have just said, look, these rules are very, very vague. So, you know, have given more benefit of the doubt to insurers and how they approach them. So I'm not worried about that on an existential basis. And I think while, you know, cheap stock can always get cheaper, I like the position here. Like it. All right. So I'm going with Trex. Now, there are some pretty good reasons to steer clear of the country's leader in world alternative decking.

Starting point is 00:08:33 Net sales have declined 3% through the first half of this year. Adjusted net income is down 19%. There's also the seasonality of the business. I know it's still hot out there in a lot of parts of the country, but fall and winter are coming and folks aren't paying a premium to upgrade their outdoor living space as temperatures start to drop. This is something that homeowners do earlier in the year before the weather starts to heat up. 65% of Trex's business last year happened in the first half of the year. Now, let's consider what might happen in September. The Fed is comfortable with making it cheaper to finance big ticket purchases. I'm not just talking about taking on a new Trex project. The real spigot here is the lack of secondhand homes on the market.

Starting point is 00:09:08 U.S. sales for existing homes have fallen sharply since peaking three years ago. Folks don't want to sell their homes locked into lower mortgage rates. It's not a coincidence that mortgage rates were a lot lower three years ago. It's also not a coincidence that Trex posted 10 consecutive years of top-line growth of 9% or better until that happened. Trex already sees net sales rebounding in the second half of this year, but that is largely off of big declines in the second half of last year. It's not much of a tariff concern because just 5% of its cost of goods sold, mostly the aluminum and steel that goes into its railings and its fasteners, are at risk. What if the strong possibility of Fed easing in September kicks off a new

Starting point is 00:09:43 decade of strong growth? I'm going with Trex. Yeah, Rick, honestly, this was my No. 2 pick for this segment, so I'm glad you brought it to the table. Their big Arkansas expansion, that doubling of capacity is exciting. But here's the thing that I'm thinking about. We just saw AZEK, which owns the TimberTech brand. That's probably the second largest competitor to Trex. It was acquired by James Hardy. It's one of the giants in building materials, largely for exteriors. There's three things that I kind of see as being likely here.

Starting point is 00:10:12 Which of these three do you think is the most likely? Does this raise the competitive bar for Trex? Does it create an opportunity for Trex to take more share if that corporate parent takes the eye off of the decking ball? Or does it signify a higher probability that this standalone pure play like Trex is a legitimate takeout target by a bigger building products company? Yeah. So, TimberTech, they're going to have more financial resources on its side, but it doesn't often play out that way. Sometimes with great financial power comes great financial irresponsibility. I'm going with your second scenario here,

Starting point is 00:10:46 and I hope Trex doesn't get bought out. And it goes without saying that all three of us are long-term investors. Hopefully, you are too. Sometimes, the market offers some short-term buying opportunities. Coming up next, GLP-1, more like GLP-lost. Why are so many of the stocks working on next-gen solutions for weight management taking a hit to the gut? We'll dig in when we come back. You gotta try breakfast at A&W. You gotta try breakfast at A&W. And what better way than with a delicious Pret organic coffee starting with just one dollar all day every day now until December 31st. You gotta try breakfast at A&W. At participating A&W locations in Ontario. Weight loss, weight loss, don't tell me. Shares of Viking Therapeutics fell 35% last week on

Starting point is 00:11:43 disappointing clinical trial results for a potentially promising oral weight loss drug. However, even the two companies with viable and by most accounts successful weekly injectables on the market aren't panning out as investments. Eli Lilly has surrendered a quarter of its value over the past year. No more door disc has been cut by more than half. Patients are losing pounds. Investors are losing pounds, euros, and dollars. What's going on, Carl? A lot of this is just a classic case of expectations getting ahead of reality. I'm going to say two kind of contradictory things about the drugs that are already on the market. You know them as Ozempic and Monjaro and a couple other brands.

Starting point is 00:12:18 One is that they're pretty great drugs already, and they might be hard to improve upon. And the second is that they don't work for a lot of people over the long haul. After about two years, as many as 75% of people are off these drugs, often due to just the grind of side effects. Nevertheless, this is a duopoly that's expected to be a $70 billion market this year. So there is a mania to come up with something better or get in the game if you're a newcomer. One obvious advantage would be to offer a pill instead of what are now weekly subcutaneous injections. And that's what you've been hearing about recently. And that's, to a significant extent, what's been a drag on many of these stocks. It's why people were disappointed in what Viking had to say. Even though they had great efficacy results, they simply had more side effects and discontinuations than investors expected. um i think that there is too much focus on these oral drugs right now subcutaneous injection is

Starting point is 00:13:17 very easy and painless once you know how to do it and you only have to do it once a week yes there are people who have needle phobias who will just never do it um and yes people will say that they prefer a pill but most studies show that people who are on injections are actually pretty content to stay there uh and the expectation has continued to be that people will start on injectables and then maybe move to orals for maintenance you might not find that people are certainly willing to take on more side effects to move to an oral drug um the last point i'll make about this is that it's often forgotten there is already an oral semaglutide on the market that is an oral version of ozempic slash wegavy it's nova nordisk's ribelsis and is not a very popular drug

Starting point is 00:14:01 because it's kind of difficult to take and um it has slightly more side effects than uh injected semaglutide so i i think that's a warning to companies about how they need to approach this they need to be looking for drugs with the best adverse event profiles not just oral at all costs or maximum weight loss in in minimum time um so far all the orals viking novo others have been marked by higher side effects than the injectables. People keep plugging away at it, but I think the next generation needs to really focus on side effects. With all that said, I think Viking and its results have been interpreted a little too pessimistically. I think there's a lot of things they can do with how they ramp dosing, etc., to maybe have this turn out to actually

Starting point is 00:14:54 be better than the other orals that are coming out to market. There are some other people working in the area that could still improve. But bottom line, it's kind of back to what I said at the beginning. We already have great drugs. They're a little hard to improve on. And for some people, that's just not good enough. Unfortunately, that's kind of how it is in the pharmaceutical industry. Carl, one of the things that stands out to me is that, first of all, when we see disruptors, it's weird how the financial profile works out for investors. And let's be clear, yeah, Novo and Lily shares are down a lot now, especially Nova Nordisk. But if we go back to the beginning of 2019, because it's before both of those were

Starting point is 00:15:32 approved for treating weight loss, but they were being prescribed off-label. So, there was a period where investors knew that it was coming, and they would officially be able to be prescribed for that. So, you go back to 2019, Novo shares are up about 153%. Lilly shares are up. They're a six-packer since then. So, investors have made money. But it got me thinking about one of the hardest things about investing in big trends, and that's finding ones that are both durable, which we're starting to see right now, what's the durability of this one, and can generate meaningful value on a per share basis for investors and for the companies involved. Here's a couple of trends that stand out. Right now, drones are huge. It's expected the drone

Starting point is 00:16:11 market is going to be like a $95 billion industry in less than a decade, so even bigger than the GLPs are right now. But so far, every dime earned by any investor on drones has been on speculation, and not the financial results of the business. Another example, 3D printing, for example. Go back 15 years ago. You remember, that was going to be the next biggest thing. Everybody's going to have a 3D printer in their home. All these industrial uses for 3D printing, all that kind of stuff. Man, a lot of people lost money. 3D systems, I think, is the gold standard of bad investments in that space. Revenue peaked a decade ago at over $650 million. Revenue has fallen substantially for that. The stock at that peak was $90 a share in that exuberant phase. It's

Starting point is 00:16:56 about $2 a share today. We look at the EV space, there's Tesla, and then nobody else, essentially. And even Tesla's stock has been a tough volatile investment over the past five years, because none of the other disruptive bets have happened yet. So I think the point is, I'm not even going to talk about solar. That makes me hurt a little bit to think about. But the point is, as investors, the hard work of analyzing opportunities is tied to not just assuming that a big multi-billion dollar trend is going to pad shareholders' pockets. Yes. I guess you can't spell trends without ends. So, when we get back from the break, we'll have some surprising takes on September 2035. Stay with us. It won't take long.

Starting point is 00:17:40 Great news. The federal EV rebate is back. Eligible customers get up to $5,000 with the federal EVAP rebate on select 2027 Volt and 2026 Equinox EV models. Visit your local Chevrolet dealer today for more details. Disruptors can be disrupted, and sometimes the disrupted become the disruptors. Jason's comments in the last segment has me thinking that sometimes the next wave of wealth-altering disruption comes from either an unexpected industry or an unexpected company. Let's look at 10 years from now. What's an unlikely company that you think has a potential to be a disruptor in 2035? Carl?

Starting point is 00:18:17 I'm going to go with one that's only at seed stage right now. And it's really it's a placeholder company for a concept. I don't know nearly enough about this company to have any confidence that it is going to be a winner or even around in 10 years. But I'm going to say Familiar Machines and Magic, which was recently founded by Colin Angle, who was the previous leader of iRobot. And the reason I just think it's interesting is because he's an interesting guy who has a very pragmatic view towards robots. And I think this is an area where actually going back to what Jason was saying, this is an area that could become very, very big and yet not produce real winnings for investors because it spreads out in unexpected ways. I think that they might be anticipating one of the expected ways, which is just not don't try to do a robot that does everything, try to do, you know, more simple robots and leverage the things that we already do well, specifically what they have said they're doing and they're in stealth mode. And specifically, they've said that they're trying to make a home health robot that is sort of a companion that's kind of leveraging AI capabilities we already have around chatbots and kind of robotic capabilities that we already have.

Starting point is 00:19:34 And I just kind of like that approach. And I would add that this robot is going to do specific things. It's not just going to be, you know, a cute companion that sort of rolls around on a tabletop. I think there is disruption waiting to happen here. And I think it might not come from do-everything robots. All right. I'm going to go with Disney. And I get it. The stock has been a market laggard over the past few years. It's posted organic double-digit revenue growth just once over the past 20 fiscal years. It's had some recent misfires at the multiplex with high-profile

Starting point is 00:20:06 movies. A lot of investors will dismiss it as a Mickey Mouse company in more ways than one. That being said, Disney has never shied away from burning its own boats. It was one of the first major studios to make its content available on digital platforms. And last year, it became one of the few to do so profitably. When the pandemic hit, Disney turned many of its planned theatrical leases into a way to boost Disney+. It consistently raises the bar with theme park technology, rewriting its own playbook for gated attractions. And last week's launch of ESPN as an over-the-top platform is disruptive to its legacy networks, but it's the courage it needs to make sure it doesn't become time's capsule fodder. How will Disney disrupt in 10 years? Content is king,

Starting point is 00:20:42 and Disney is the lion king of content. Right now, AI is seen by some boo-birds as a threat to content creators, but in the future, it will be a way to amplify strong IP and storytellers. The Disney I grew up with leaned on theatrical releases and then spacing out home video releases from its vault. Today, there are more revenue streams to paddle. If AI opens, even more possibilities to cash in on strong franchises. Who's the leader of the band? M-I-C-K-E-Y-M-O-U-S-C. Rick, I might be putting good money after bad here, going full circle here and bringing 3D printer, 3D printing back in. But I want to stick with the theme of big trends not always working out how we expect. In this case, Lenar, which is one of America's biggest homebuilders. Lenar sold

Starting point is 00:21:25 about 70,000 homes last year. Essentially, 100% of those were stick-built traditional lumber assembled into walls and ceilings and roofs and then covered with plywood and siding and drywall and shingles done by skilled laborers. But right now, they're doing something different. Back in 2023, they built a 100-home community in Texas, partnered with a company called Icon, and 3D printed the houses. They're working on a 200-home community next. The homes require significantly less labor, like a dozen less laborers to build. This labor is an ongoing challenge for this industry. And they're far more energy efficient, too, though materials costs are higher. A decade from now, I think it's going to be the big players like the Lennars that are leveraging

Starting point is 00:22:13 disruptive technologies like 3D printing to improve their own business models to meet demand. You can think of it like companies like Apple and Microsoft that learned you have to disrupt your own legacy big winning products if you're going to remain relevant for the long term. And I think this is one of the areas we might see 3D printing with the big home builders like are that adopt that technology. Yeah. So, I'm circling August 25th, 2035 on the calendar to see if any of us, or maybe even all of us, were right. Carl and Jason, thank you for making this Monday Mischief Managed. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for

Starting point is 00:22:52 or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards as it's not approved by advertisers. Advertisements and sponsored content are provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For Carl Thiel, Jason Hall, and the entire Motley Fool Money team, I'm Rick Nars. May your days be funny and your life Motley Fool Money.

Motley Fool Hidden Gems Investing - Weight Loss. Weight Loss. Don’t Tell Me.

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