Motley Fool Money - Weight Loss. Weight Loss. Don’t Tell Me.

Starting point is 00:00:00 Are weight-lost 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 Menars, and today I'm joined by fellow analyst Carl Teal and Jason Hall with a look at what's eating at weight-lost 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.

Starting point is 00:00:34 We went into the final trading week of our time. August with renewed hopes for a Fed rate cut next month. However, the economy is still fuzzy, inflationary pressures are percolating, and the 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 policies, 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.

Starting point is 00:01:12 That's Tendous Trace Bay in its native Spanish. I apologize to all the Spanish speakers for murdering the pronunciation there. It's BB Foods and its corporate parlance, it's ticker TBBB. I've been following the business since our friend and colleague Tyler Crow put it on my radar. It's been a couple years ago since before it went public back in February 2024. I first bot 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. monetary and trade policy.

Starting point is 00:01:47 However, it has about $400 million in cash and equivalence. 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, two years ago, February in 2024. The U.S. dollars weakened a lot against the pace of money's now worth less in buying power. The good thing for BBB Foods is that it's 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. But that means you have 18% of revenue growth that was left over from same store sales.

Starting point is 00:02:24 That's pretty incredible. It's opening stores at a fast rate, about 500 over the past four quarters. just past 3,000 total this quarter. Even at this pace of growth, management is, like I said, they're being really savvy. The business is essentially running it right at break-even. Now, that's a great change of pace for investors that are tired of high-growth companies with big losses, just hoping of the, you know, finally getting to scale on things paying off.

Starting point is 00:02:52 I think BBB Foods is compelling right now. It's built to operate across economic cycles and really largely unaffected by U.S. economic policy. So, Jason, I know this is a small footprint model by which I mean the size of the individual stores themselves. Right. But for a chain that has 3,000 stores and, you know, in a business with notoriously low margins still running a 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?

Starting point is 00:03:30 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 bit similar to like the Audi 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, you know, two or three percent, if you're constantly turning your inventory, you can still build a really high return profitable business in terms of scale.

Starting point is 00:04:11 Again, tiny footprint here. This is a business that can easily 5X, potentially even. They've talked about maybe 30,000 locations over the 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 U.S., actually, I think an interesting cop, like the auto zones of the world, where you don't necessarily get super high margins.

Starting point is 00:04:39 O'Reilly is another example. But you're just really good at what you do. You turn your inventory and you have a somewhat countercyclical 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 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

Starting point is 00:05:08 and also happens to be pretty depressed right now. And I'm going to go with United Healthcare. This is certainly a company that's had one problem after the next. It recently hit a five-year lows. 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,

Starting point is 00:05:34 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 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, and there are some other big names that are kind of getting behind this. And, you know, the fact is that this has become a pretty cheap stock. I mean, it's trading a little under 19 times the current year's earnings projection,

Starting point is 00:06:12 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. And they continue to pay a dividend at the same. time. You know, this just remains a really powerful company at the center of the health care system. They're $400 billion in annual revenue, actually more than that. That's bigger than the GDP of many countries. It ensures about one in six people in the U.S. is 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, which is not to say.

Starting point is 00:06:53 say that there couldn't be some really large fines in the future, but I don't think it's an existential threat to the company in any way. So, bottom line, there's a lot of reasons for United Health Care 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 the economy, as we move into the later part of the year, could get a little more uncertain, I think United Health Care gets bottom. I'll benefit it a lot less by that than many other companies would. Yeah, Carl, but sometimes like in Imelda-Marco's shoe closet, there are more shoes to drop. Sometimes cheap stocks get even cheaper. Is that a concern?

Starting point is 00:07:35 Absolutely. I mean, there's certainly things that could happen. I would say, you know, the biggest unknown is probably around some of the investigations. Not that it is all, I think of the Medicare fraud investigation. investigations around tenant health care from years and years ago that 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 Wood 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 that'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 US 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 topline 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 his fasteners are at risk. What if the strong possibility of Fed easing in September kicks off a new decade of strong growth? I'm going with Trex.

Starting point is 00:09:45 Yeah, Rick, honestly, this was my number two 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 Azac, which owns the Timber Tech brand. That's probably the second largest competitor to Trex was acquired by James Hardy. It's one of the giants and building materials, largely for exteriors. There's three things that I kind of see as being likely here. Which of these three do you think is the most likely?

Starting point is 00:10:14 Does this raise the competitive bar for Treks? 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 likes Trex is a legitimate takeout target by a bigger building products company? Yeah, so Timber Tech, 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, and I hope Trex doesn't

Starting point is 00:10:47 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, GLP1, 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. The old adage goes, it isn't what you say, it's how you say it, because to truly make an impact, you need to set an example and take the lead. You have to adapt to whatever comes your way. When you're that driven, you drive an equally determined vehicle, the range rover sport, the Rangerover Sport blends power, poise, and performance. Its design is distinctly British and free from unnecessary details, allowing its raw agility to shine through. It combines a dynamic sporting personality with elegance to deliver a truly instinctive drive. Inside, you'll find true modern luxury with the latest innovations in comfort. Use the cabin air purification system alongside active noise cancellation for all new levels of quality and quiet. Whether you prefer a choice of powerful engines or the plug-in hybrid with an estimated range of

Starting point is 00:11:51 53 miles, there's an option for you. With seven terrain modes to choose from, terrain response to fine-tuned your vehicle for the roads ahead. The Range Rover event is on now. Explore enhance offers at Rangerover.com. Weight loss, weight loss don't tell me. Shares of Viking therapeutics felt 35% last week on disappointing clinical trial results for potentially promising oral weight loss drug. However, even the two companies with viable and by most account 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 disk has been cut by more than half. Patients are losing pounds. Investors are losing pounds, euros, and dollars. What's going on, Carl?

Starting point is 00:12:31 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 Ozmpic and Monjarro and a couple other brands. 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

Starting point is 00:13:15 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. I think that there is too much focus on these oral drugs right now. Subcutaneous injection is very easy and painless once you know how to do it, and you only have to do it once a week.

Starting point is 00:13:48 Yes, there are people who have needle phobias who will just never. or do it. 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. 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. 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 Ozympic slash Wegavy. It's Novo Nordisk's ribelsis and is not a very popular drug because it's kind of difficult to take and it has slightly

Starting point is 00:14:32 more side effects than injected semaglutide. So 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 minimum time. So far, all the orals, Viking, Novo, others have been marked by higher side effects than the injectables. You know, 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, et cetera, to maybe have this turnout to actually 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.

Starting point is 00:15:27 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 prove 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 Lilley shares are down a lot now, especially Nova Nordisk.

Starting point is 00:15:54 But if we go back to like the beginning of 2019, because it's before both of those were approved for treating weight loss, but they were being prescribed off label, right? So there was a period where investors knew that it was coming, right? and they would be officially be able to be prescribed for that. So you go back to 2019, Novo shares are up about 153 percent. Lilly shares are up. They're a six-backer since then, right? So investors have made money.

Starting point is 00:16:17 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. There's a couple trends that stand out right now. Drones are huge, right? it's expected the drone market is going to be like a $95 billion industry in less than a decade. So even bigger than the GLP's are right now.

Starting point is 00:16:44 But so far, every dime earned by any investor on drones has been on speculation, 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 like the gold standard of bad investments in that space. Revenue peaked a decade ago at over 650 million. Revenue is fallen substantially for that.

Starting point is 00:17:17 The stock at that peak was $90 a share, kind of in that exuberant phase. It's 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, all-dollar 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's just, that makes me hurt a little bit to think about.

Starting point is 00:17:42 But the point is, is investors, like 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 take. on September 2035. Stay with us. It won't take long. What does leadership really look like? On the power of advice, a new podcast series from Capital Group, you'll hear from athletes, entrepreneurs, and executives who've led on the field, in the boardroom, and in their communities. It's not about titles. It's about impact. Discover what drives them and the advice they carry forward. Subscribe and

Starting point is 00:18:25 start listening today. Published by Capital Client Group, Inc. Disruptors can be disrupted. And sometimes the disrupted becomes 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 out 10 years from now. What's an unlikely company that you think has a potential to be a disruptor in 2035? Carl? 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 in magic, which was recently founded by Colin

Starting point is 00:19:07 Engel, who was the previous leader of I-Robot. 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. Specifically, they've said that they're trying to make a home health robot that is sort of a

Starting point is 00:19:56 companion that's kind of leveraging AI capabilities we already have around chatbots and kind of robotic capabilities that we already have. 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 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 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

Starting point is 00:20:54 plan theatrical releases into a way to boost Disney Plus. 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 Times capsule fodder. How will Disney disrupt in 10 years? Content is king, 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

Starting point is 00:21:35 to cash in on strong franchises, who's the leader of the band, M-I-C-E-Y-M-O-U-S-C? Rick, I might be putting good money after bad here, going full circle here and bringing 3-D printing back in. But I want to stick with... the theme of big trends not always working at how we expect. In this case, Lenar, which is one of America's biggest home builders, Lenar sold about 70,000 homes last year. Essentially 100% of those were stick-built traditional lumber, assembled into walls and ceilings and roofs, and then cover 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.

Starting point is 00:22:20 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 to the materials costs are higher. A decade from now, I think it's going to be the big players, like the Linarz, that are leveraging 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,

Starting point is 00:22:55 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 Lenar that adopt that technology. Yeah. So I'm circling August 25th, 2035 on the counter to see if any of us, or maybe even all of us, we're 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 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. Advertisants

Starting point is 00:23:33 and sponsored content are provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For Carl Teal, Jason Hall, and the entire Motleyful money team, I'm Rick Nars. May your days be funny and your life, Motley Full Money.

Motley Fool Money - Weight Loss. Weight Loss. Don’t Tell Me.

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