Snack Slump and Obesity Med Discounts. Plus, Merrill’s Bullish Outlook

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And you know this as well as I do, there's over $6 trillion sitting in money market funds. So anyone listening to this broadcast, podcast, if you have money in the market, money market funds, you're leaving money on the table near term and long term in particular.

Hello and welcome to the Barron Streetwise Podcast. I'm Jack Howe, and the voice you just heard is Joe Quinlan. He's the head of CIO market strategy for Merrill and Bank of America Private Bank, and he's hecka bullish. Is that something the young people are saying, Jackson? Hecka? I know they say hella, but I don't like the salty language. You know that.

Yeah, I recall hecka from my childhood. It's a West Coast parlance, I think.

Yeah, it's spreading now. It's spreading. In a moment, we'll hear from Joe about the stock market, the bond market, the economy, the national debt, all of it. But first, we'll say a few quick words about salty snacks and discount obesity meds. Listening in is our audio producer, Jackson. Hi, Jackson.

Hi, Jack. I think the few quick words is a lie you tell our listeners. Every single week.

That's fair. It will be more than a few, but I will try to make them kind of quick. Have you tried the new Coke-flavored Oreo or Oreo-flavored Coke?

I, I'm, I'm like the last person to ask for a new snack food flavor.

You don't eat that stuff. My, my wife, uh, brought home both of them the other day from Target, and I was tempted to dip the cookie in the Coke, but I didn't want to set off a chain reaction of brand overreach.

They both sound very, uh, unnecessary.

The soda was bordering on a crime. The, the cookie was better. It has popping candy in the cream, and by cream I mean C-R-E-M-E. I, I wasn't sure what I thought, so I looked up what someone else thought. There's a blogger out there who has tasted 93 Oreo flavors, and they ranked the Coke flavor at number 69. That's Better than Sour Patch Kids Oreos, but not quite as good as Kettle Corn Oreos.

I've been missing out. They look so red too. Were they this bright red in real life?

They were pretty bright on one side. The other one side was Oreo color. The other side was fire engine red. Coca-Cola, right?

I'm looking at this blog. I think I'm curious about this Oreo Thin Piña Colada coming in here at 86 out of 93.

You feel like it's unfair? Like it deserves another?

It seems about right.

Some of the stuff makes me wonder if big food has run out of ideas on snack innovation, brand fusion. I was in my local grocery store the other day and I passed by an end display of Old El Paso Cinnamon Toast Crunch dessert taco shells.

Is that, is that really? No way.

Take, take all those words in.

It sounds like a memory test.

Yeah. Where does General Mills go from here? Remember the Alamo Cookie Crisp? I'm a Cinnamon Toast Crunch fan, but I'm not having it. Now, I mentioned this because we've had some weak results in snacks, and brand mashup overreach was not nearly my best theory about what's going on. My best theory had to do with obesity meds. This past week, PepsiCo reported quarterly results and it beat earnings estimates, barely squeaked by them, but it lowered its sales forecast and it had declines in the crucial Frito-Lay North America division. Pepsi's a soda company, of course, but it's also a snack giant. Frito-Lay, Jackson, that's not just your Fritos and your Lays. That's your Doritos, your Cheetos, your Sun Chips. You got your Cracker Jack, your Tostitos, Funyuns, Rolled Gold, Ruffles, Smartfood, Munchos, and Munchies. Did I mention Nut Harvest? I feel like I would remember if I mentioned Nut Harvest. Okay, so this was the company's weakest quarterly sales result in 4 years. That's one piece of evidence of a snack aisle mystery. The second piece, recently America's obesity rate declined for the first time since 2011. That's according to the Centers for Disease Control and Prevention. Sort of. They say it's not statistically significant, but I'm calling it a win. America was 30% obese back in 2000. If you go back to 2020, the rate was 41.9%. The latest reading, which goes through 2023, is 40.3%. Are we getting slimmer? At this rate, I feel like we're going to fit in our 2015 pants soon.

I like the idea that every year all of America has to fit in, has to get together and try to fit into a giant pair of pants.

I'm just gonna move right past that. Let's never speak of that again. Okay, so I saw a separate analysis this past week from Morgan Stanley. It's about obesity meds, including the knockoffs that are sold by compounding pharmacies. We're going to circle back to that in a minute.. But for now, just know that Morgan Stanley estimates that more than 7 million people are taking this new class of obesity drugs. So now I had the makings of a better theory, and we've talked about this before. Can obesity drugs, which do curb the urge to snack, help explain why— wait for it, Jackson— the chips are down for Pepsi? That's hypothesis 1. That's my main hypothesis. Or it was, but on the earnings call, Pepsi CEO Ramon LaGuardia didn't sound too concerned. He said, we've seen Gen Z snacking patterns. Jackson, you're the last millennial, right? You're not Gen Z.

Not Gen Z.

He's, he's probably seen your snacking patterns too, but he said, we've seen Gen Z snacking patterns and food patterns being in a way that favor the growth of our category. They are snacking more.

It's all those, have you ever familiar with girl dinners and boy dinners? Yeah, maybe that's the Gen Z he's referring to. It's where instead of making yourself a proper meal, you just eat instant noodles, frozen pizza, or just like an entire rotisserie chicken.

Well, why is it a girl? Which one's a girl and which one's a boy dinner?

I think the girl dinner was like you maybe just have some, and this is discriminatory by the way, so I in no way endorse this, but that was just, uh, But a girl dinner is like maybe hummus and carrots, and a boy dinner is maybe Doritos and an entire rotisserie chicken.

Human resources would like a word. You know, it's funny you mentioned that. It does line up with something he said on the call. Let me pull it up. Here's the transcript. Ramon did mention a couple of times about Gen Z. Here he says they're eating mini meals versus large meals. And that favors our brands and the number of occasions that the category will grow. Here it is later in the call. He said, the concept of mini meals, the concept of replacing a big meal with a smaller meal— you can think about a Sabra hummus with a Tostitos and a banana or something.

Sounds like he's just spitballing, but, but I understand what he means.

Well, it sounds like he's trying to work in some of the company merch.

Throw in a banana, maybe. What else might go with hummus?

I mean, you couldn't name 3 company products. That would have much. Throw in a banana. Okay, so Ramon called Frito-Lay results a, quote, normalization after 3 years of fast growth. And he said that consumers are reassessing their budgets and that convenience store traffic has been weak. But he also said he has big plans for football season. You know, that's crunch time for potato chips and tortilla chips. He says, quote, we're giving 20% more product in Tostitos and Ruffles. Pour those in a bowl, Jackson. With 20% more, you don't want your friends going wrist deep in one of those bags. Okay, so Pepsi is bullish on snacks but sees signs of price sensitivity, and that lines up with something that Brian Spillane over at B of A Securities has been saying since early summer. He's been calling out a salty snack slowdown back around July 4th. That's a big chip holiday. He said demand was up only about 2% and that there was a lot of discounting. There wasn't as much discounting around Labor Day and sales then slipped 2%. Around the end of September, Brian wrote, quote, promotions are enticing heavy users that theoretically would've paid a higher price while failing to draw infrequent/incremental consumers into the category. I have mixed feelings about being called a heavy user, but I do take Brian's point. The chip makers seem to be discounting to hold the line on sales, not to grow. Meanwhile, when you look at convenience store trends, I've seen some trade groups talking about sales rising this year, but that has a lot to do with inflation. There was an analysis this year by a market researcher called Upside. They found that consumers are making fewer trips to convenience stores and buying fewer items, and that the main reason was cost concerns. And I get that, Jackson. If you were the kind of person to eat chips and drink soda, you'd be outraged by the prices they're charging lately. Both potato chips and soda went through decades of slow price growth. Suddenly, over the past 5 years, potato chip prices are up 47%. That's according to the St. Louis Fed. Soda 12-packs are up 66%. Both of those numbers are down slightly from recent highs. I wonder if that's in part because consumers are pushing back. Okay, so B of A is keeping Pepsi rated at buy. It has a price target of $185 a share. That worked out recently to about a 7% gain from recent levels, and the dividend yield is 3.1%. But the price target also works out to about 22 times next year's earnings estimate. That is, believe it or not, cheaper than the overall stock market, but I feel like it's a lot to pay for a slow grower. Even if it's a defensive company. Also, Pepsi has now underperformed the S&P 500 over the past 1, 3, 5, 10, and 20 years, and so have General Mills— that's the Cinnamon Toast Crunch company— and Mondelēz International— they own Oreos. Maybe it's not quite a fair comparison. Big food has underperformed the S&P 500 in part because big tech has run up so much, but I feel like the combination of pricey shares and ho-hum returns doesn't add a lot of appeal for investors. If you're looking for a snack stock, B of A's favorite is Utz. I can't remember, Jackson, are we saying Utz or Utz? I went through this on a past episode.

Yeah, I can't remember.

We're saying Utz. I knew it. So there, B of A has a price target of $23, and that suggests 37% upside. That target would put shares at 18 times projected earnings. So Utz is a little cheaper. It's also gaining market share, and BofA attributes that to two timely attributes. Utz competes more with value brands than with full-price ones. Also, it has less exposure to convenience stores than the industry giants, and they make a mean pretzel rod. I'm actually a semi-regular purchaser of Utz pretzel rods, the, that $10 canister that they sell. What happens is where I live, a bunch of the dads get together once in a while for beers around a big campfire, and I like to show up and say, "I brought my famous pretzel rods," and hilarity ensues. And the other day, a big roadside tree came down— wait, there's more to the story? Yes. Partly on my neighbor's property, and I hired some guys to help clean it up, and my neighbor was so grateful he dropped off— what, Jackson?

It's pretzel rods and a six-pack.

Nice. You see, you thought there wasn't going to be a payoff to that story and you were right.

So obesity drugs are not to blame for the snack pullback over there at Frito-Lay?

The snackpocalypse? Not yet. We'll see what happens down the road. We're at, as I said, more than 7 million users now in the US. Morgan Stanley predicts more than 20 million by the early 2030s. By the way, one last note on the obesity drugs. On this podcast, we spoke in the past, remember, Jackson, about the compounding pharmacies.

Yeah, because the obesity drugs, the, the branded drugs are in short supply, there's a loophole where compounders can make and, and sell copies of the drugs, right?

Every Tom, Dick, and Henrymeds.com can pitch their own obesity meds at a discount, including pills which the pharma giants don't even sell yet. The rule is the drugs have to be listed on the FDA shortage list, and there's only certain compound pharmacies that can do this. So of the people taking obesity drugs right now, Morgan Stanley estimates that 6.8 million of them are using branded drugs, and about 400,000 of them are using obesity drugs from compounding pharmacies, copycat drugs. There are some estimates for that that are much higher, and the full sticker price for these obesity drugs can run over $1,000 a month, but those compounded drugs are selling for $100 a month to $450 a month according to one estimate. I mentioned this because the FDA now says that tirzepatide is no longer in shortage. That is sold as Mounjaro for diabetes and Zepbound for obesity. That's Eli Lilly's drug. Novo Nordisk has a drug called semaglutide. That's sold as Ozempic for diabetes and Wegovy for obesity. And that drug is no longer in short supply except for the lowest dosage of Wegovy autoinjectors. In other words, all these compounding pharmacies could be losing this revenue source soon, and all these patients who've been turning to them for discounts are either going to have their obesity drugs interrupted or they're going to have to find them somewhere else. That's a tough situation for folks with limited means or no insurance. Now, Eli Lilly does have a savings card that some patients can use for Zepbound, and it'll cut the cost to $650 a month. That's not a humongous discount, but it's an option. Also, for those without insurance, in August, Lilly announced Zepbound vials that can reduce the cost to $399 a month. What do I mean by vials? I mean, instead of taking an auto-injector pen and clicking it into your arm, you have to take a syringe and stick it into a vial and draw the stuff out yourself and administer it yourself. Seems like an unpleasant way to find savings, but I guess it'll be helpful for some people. So investors might be wondering, what does this mean for Lilly and its earnings? And Morgan Stanley has taken a crack there. It stands to gain market share, and depending how much it gains, Morgan Stanley figures it could add anywhere from a low single-digit percentage to 20% to next year's earnings estimates. That's, I guess you could say, modest compared with how much money these companies stand to make over the long term. And that is discounted obesity drugs and snacks. And it's time for a break. Jackson, my snackpocalypse-averted music, please.

I'll look for something cheesy and crunchy.

All right. Don't use your music theory jargon from Juilliard. Coming up, we'll hear from Joe Quinlan from Merrill and Bank of America Private Bank about stocks, bonds, and what investors should expect after this quick break.

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Welcome back. It's third quarter earnings season. We're in a rate-cutting cycle. There've been some hurricanes. There's a war in the Middle East. There's a war in Ukraine. I'm told there's a US election coming. Most of that has me stressed, and I wanted to hear from someone upbeat about the outlook for investors. Let's listen to part of my recent conversation with Joe Quinlan. He's the head of CYO market strategy from Merrill and Bank of America Private Bank.

You come into this one pretty strong, by the way.

Jackson, what do you mean when you say I come into this conversation pretty strong?

There's no introductions. You just jump right into needing to know answers.

I skipped the small talk?

Yeah.

I told you I was stressed. Let's hear it. Tell me everything I need to know about money and investing right now. First of all, I guess start with the US stock market. It looks pricey and it looks like all the same things have been working for a long time, but that's causing people to think maybe I should just stick with what I'm doing. Do you see anything different coming for the US stock market? Does it look unusually expensive to you?

The US economy and the US stock market look pretty robust here, and that, that kind of worries me. Valuations are stretched, uh, not, not terribly overdone, but a lot of good news is priced into the markets for sure. And to keep the party going, We're going to have to have better than expected earnings for Q3. We need the geopolitical tensions to be dialed back in the Middle East. And then the ultimate, an election result that comes in as no sweep when it comes to Republicans or Democrats, because that's what the markets are pricing in. So the party can roll on, but I don't disagree with your sense in this, in that the market is fully priced for a lot of good news that's transpired.

You said no sweep, you meaning different party controls Congress than controls the White House?

Either or. I mean, the markets are not priced for a sweep, either Democrats or Republicans. The markets are, I think, being complacent about a divided government. So that's, you know, the big unknown unknown here is the composition of Congress. We know one of them is going to get elected, Harris or Trump, obviously. But what's the composition down the street? And that's going to be hugely important.

How does the economy look to you? Would you say, is it sturdy? Is it precarious? What do you see?

Sturdy, Jack. And I've been writing about this for quite some time, talking to our clients all over the country. Every small, mid-cap, large-cap company I talk to talks about increasing productivity via automation and AI, looking for workers, you know, whether it's skilled or unskilled, to higher-income households that drive consumption. They're doing very well with home appreciations, a very strong stock market. The unemployment rate amongst college-educated workers with a 4-year degree or more is 2.1% now. So, the labor market, there's a lot of demand. So, to me, consumer's pretty steady. We're seeing the AI build-out data center. So, CapEx looks pretty good there as well. So, to me, we're running around, say, 2.5% real GDP annualized heading into next year. So, it's sturdy.

You had a note out several weeks ago arguing that foreign demand for US assets should remain strong. How, how important is that demand and, and why do you think it will remain strong?

Well, it's important, Jack, in the sense that you look at the US equities, 20% owned by foreign investors, corporate bond markets owned by foreigners, 32%, and US Treasuries marketable, US Treasuries around 27.5% owned by foreigners. So on the margin, they are very important in terms of how they view the economy, where they want to put their excess dollars to work their excess savings. And talking with sovereign wealth funds or family offices over in Dubai, Singapore, Santiago, they want to be part of this bull market here in the United States. Whether, you know, when you're sitting overseas in a volatile part of the Middle East or in China where the tensions are rising, or Europe that's just stagnating, you do cast your gaze over to the US and that's where you want to put some money to work. So, we're seeing that continue, that flow. As long as the US continues to lead in terms of growth, being dynamic, resilient, The only fly in the ointment is an administration that comes in in January is very protectionist, very nationalist, and goes down the tariff immigration route and that closes the borders. That could spoil the party in terms of the foreign appetite for US securities.

Is there anything investors should be doing differently right now? If we picture the most typical investor we can think of, Mr. or Mrs. Ordinary, and they're, uh, you know, middle age and middle income, and they have 60% in stocks and 40% in bonds, and they use the most popular index funds out there to do that. Is there any way in which they do or don't have the right exposure that they need right now?

I think, Jack, the biggest thing, and you know this as well as I do, there's over $6 trillion sitting in money market funds. So anyone listening to this broadcast, podcast, if you have money in the money market funds, you're leaving money on the table near-term and long-term in particular. US equities have proven to be the long-term vehicle for wealth generation. So we like US equities. It's a big world out there, but the US is still leading the way in terms of growth, resiliency. To me, that's not going to change. China, we got a little bump up here. I wouldn't chase China if I'm sitting at home listening to this podcast. I think China's got a lot of heavy lifting to do. The real drivers of growth are companies that can grow faster than nominal GDP, and they have core competencies that are unsurpassed. And whether it's technology, energy, financial services, transportation, you name it, they're here in the US. So own the US, don't try to time the market.

I have heard some folks argue in favor of adding a tilt toward things that maybe haven't worked as well over the past decade, but that might be attractively priced here. Some people say value stocks, some people say small caps. What do you think of that idea?

We like that. I mean, values, I think what is going to have its day, it has improved in Q3 in September as well. Small cap, definitely as well. Cost of capital is coming down. Mid-cap, look at mid-cap, some good companies there. I wouldn't go both feet with the value and the small cap, make a barbell or really diversified. But yes, we're going to see better breadth for the broader S&P. And so there you want to have that portfolio position for that broader upward rally.

What do you think about bonds here? And if investors are— you spoke about investors who have a lot of money in money markets. So suppose some of those investors say, okay, I'll put some in stocks, I also want to put some in bonds. What should they do? Should they buy longer bonds, stay short?

What should they be thinking? In the middle part of the curve, shorter durations in general versus long-term. But we think the 10-year yield back up around 4%, we're normalizing. So, we're going to get the fixed and the income from fixed income. So, you want to lock in some fixed yield in the income space, and that should be part and parcel of the portfolio because here's why. We don't think we're going back to zero interest rates. We're not going back to inflation below 2%. We're not going— we're more, I think, in a more reflationary inflationary environment heading into the second half of this decade. Why? Because we've got nationalism, protectionism, industrial policies that are raising the cost on companies, elevating inflation. So, I think that's key. We could have an AI productivity that pulls it down. But in general, we're not going back to that zero interest rate environment, negative interest rates overseas in some cases. So, We think the fixed income is a place to put some balance, some safety in your portfolio.

So you are optimistic, I guess, you know, bullish here on the, on the US economy and on the stock market. If it turns out that that was misplaced, right? If we're looking back 5 years from now and we said, wow, that was a disaster, where do you think it will have come from? What are the things that you're looking at on the periphery where you say this could go wrong with my view?

What could go wrong, Jack, is it's kind of like recessions, bear markets. I mean, they're manmade. And what worries me, either administration come 2025 doesn't pay attention to the deficits that they're running, ignores them. So, the markets have to take them to the woodshed, number 1. Number 2, we do continue to go down this path of protectionism, nationalism, industrial policy, deglobalization. Which is going to be hugely costly to companies, US companies. So, inflation is more elevated than expected. The Fed, we short-circuit the Fed easing cycle. We don't get along with China. China goes its own way and really carves up the globe, sets that less business, lower earnings, higher inflation, higher cost of capital. That's what really worries me in that sense. It's deglobalization. It's related to the fact that the world over, including the United States, these big budget deficits that no one seems to care about. Keeping the world open for business is going to be critical for US returns in the second half of this decade.

Sometimes I wonder about that debt. We've been talking about it getting out of control for so many decades now that you wonder, is there still a benign path here? Is there still a way forward where this thing can be manageable and when we can get it under control over years to come? At what point does it get out of our reach?

Jack, we're not near that point where it's out of our reach. In fact, it's very manageable right now. Gross public sector debt as a percent of GDP, it's 100%. We can manage that. I mean, we're a $30 trillion economy where we're massive, we're diversified, we're resilient. So, you know, you got to grow the denominator. So it's going to be a combination of growth, inflation. But we do have to get serious about raising revenue and be smarter about the outlays. I mean, for all this spending, Whether it's the CHIPS and Science Act, the infrastructure, what are we getting? What's our rate of return? So, when we're going to give all these subsidies for chips, solar panels, batteries, EVs, you name it, is it going to pay off, or we're going to just be left with a lot of debt and not much cover to help cover the interest payments? Another issue is defense spending. In my opinion, it's too low given the world that we live in. It's only 3% of GDP. In the world we're living in, it's going to have to go higher. We've got some difficult decisions to make in front of us on the fiscal front, but what saves Uncle Sam is this very private, dynamic private sector that continues to grow the denominator. So we, we've got time. I don't know if we've got the will.

Last question for you. Can you tell me either about a question that you're hearing from a lot of folks that you deal with that you think is on people's minds right now, uh, or about a mistake that you see a lot of people making that you think they don't realize?

Jack, the number one is just people being paralyzed by the political polarization here in this country. That's keeping them afraid, keeps them up at night, keeps them from investing, want to be in cash. And I do think they're underestimating the strength of our institutions, political institutions, the checks and balances. So that's, I see that a lot. You know, it worries me that they're worried that much for sure, but the polarization is there. No doubt, but I think they're missing out on the bigger, broader picture that we have strong institutions, we believe in them, checks and balances, and that behind these institutions is a phenomenal US economy that if handled correctly, and, you know, private and public sector, that is going to continue to generate wealth. So don't miss out on the wealth generation of the economy because you're politically paralyzed.

Thank you, Joe, and thank all of you for listening. Jackson Cantrell is our producer. He's making himself a boy dinner. I think he's going all pretzel rods and pepperoni. Nice. Do you know that when I was a kid, I used to buy pretzel rods from the town pool snack shack for 5 cents apiece? 5 cents, Jackson. Warm summer day. I feel like Queen of Hearts by Juice Newton was probably playing on the radio at the time.

Are you auditioning to be a grandfather?

I'm 100. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen. Thanks and see you next week.

Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data making it actionable and powerful for you. Morningstar, where data speaks.