Refuting the "GLP-1 bear market theory"! RBC argues that the market's panic over food and beverage stocks is excessive.

According to the Zhongtong Finance APP, RBC Capital Markets in Canada stated that the recent frenzy surrounding a new type of weight-loss drug has caused some stocks to plummet, making food companies appear more attractive.

Stock prices of well-known companies such as Hershey (HSY.US), Coca-Cola (KO.US), pretzel manufacturer Utz Brands (UTZ.US), and Napa Valley wine producer The Duckhorn Portfolio (NAPA.US) have all experienced double-digit declines this year. Part of the reason is that people are concerned that those who take GLP-1 drugs (a type of medication used to treat diabetes and obesity) will reduce their consumption of these companies' products. However, RBC analysts, including Nik Modi, stated that the "GLP-1 bear market theory has gone too far," which has resulted in lower valuations for consumer staples and increased attractiveness of these stocks.

In a report last Friday, the analysts wrote, "Although we have not yet emerged from consumer pressure, we believe that given the sentiment around GLP-1, the industry is starting to look more attractive." They added that macroeconomic concerns, slowing sales rebound, geopolitical risks, and rising interest rates have also contributed to this year's slump.

Earlier this month, consumer staples in the S&P 500 index experienced their largest single-day decline since January, after Walmart (WMT.US) warned that the retailer had seen the impact of medications on food shopping demand. Although the sector index has since rebounded, its performance in 2023 is significantly lower than the broader market index.

The consumer staples index, including large stocks such as PepsiCo (PEP.US) and Oreo biscuit manufacturer Mondelez (MDLZ.US), is currently at its lowest level since the outbreak of the COVID-19 pandemic in early 2020, based on a two-year forward price-to-earnings ratio.

RBC's global analyst team stated last Thursday that concerns about the impact of these drugs on certain areas of the healthcare and other industries "may have been exaggerated, and may have even reached its peak." They pointed out that feedback from doctors indicates that there is evidence of intolerance in some patients, signs of lower compliance compared to other therapies, and the affordability of the medication.

Meanwhile, consumer staples companies are also trying to alleviate investor concerns. PepsiCo stated in its recent earnings conference call that the impact of GLP-1 on its business has been "negligible" so far. Conagra (CAG.US) stated that it is now "too early to judge" what impact these appetite suppressants will have, and it may take many years for GLP-1 to lead to changes in dietary habits.

RBC is not the only analyst defending the essential consumer goods industry. Last Thursday, TD Cowen analyst Robert Moskow wrote in a report that he has not seen any signs of GLP-1 drugs compressing (food) sales in his retail tracking data. He stated that the selling of beverage stocks has been particularly exaggerated, as most beverage consumption is for hydration rather than satiety.

RBC analyst Modi also added that past facts have shown that concerns about disruptors in the consumer goods sector are often exaggerated. Take Beyond Meat (BYND.US) as an example, the company once raised questions about the future of traditional meat. Now, both the company and its plant-based peers are struggling to cope with declining sales. In another example, Amazon's (AMZN.US) acquisition of Whole Foods Market in 2017 seemed to disrupt the grocery shopping experience, but they pointed out that Walmart is still the industry leader today.