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July/August 2014 Issue
Last Updated Wednesday, August 20 2014
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Word From Wall Street: Are We Back?



Companies that want to succeed in nutraceuticals need a clear strategy for growth.



By Adam Ismail



Published October 1, 2012
Related Searches: Nutraceuticals Health Functional Foods Natural
The global stock markets (as this issue went to press) are generally reaching new highs and are back to pre-financial crisis levels. Yes, the job market still has a long way to go and economic growth is not exactly strong…even Germany is teetering and could fall back into recession. However, the equity markets are coming back strong, so checking in on the nutraceutical equity markets might be interesting. This column and others have consistently written about how nutraceutical stocks in general have been good investments for reducing your risk relative to the broader equity markets, but why is this and does it hold true in a bull market recovery? 
 
When stock markets collapsed in 2008, our industry fared much better than the overall market. The theory was that consumers were still interested in investing in wellness, particularly when they could not afford major medical expenditures (leading to the assumption that the industry was somewhat recession proof). However, usually stocks that are less volatile than the broader market do not outperform the market in good times. The concept of lower risk, lower return is a statistical measure that ignores the fundamental drivers of a given company or industry. At the same time, there is no such thing as a stock that will over the long run rise faster than the market in good times, and fall less than the market in the bad times. Hundreds of years of data back this up. That said, in certain situations and in specific periods of time it can happen because the fundamentals are just right.


 
The best way to analyze this is to pick a basket of nutraceutical equities that were available both before the crisis began in August of 2008 and have been publicly traded continuously until today. In the basket of 11 companies in Table 1, for example, we captured a mix of firms from various parts of the industry, including ingredients, retail supplement brands, network marketers, natural retailers, and even functional foods. Of the 11, only three companies’ share prices lost value over the last four years. More importantly, the ones that grew did much better than the S&P 500 index.
 
In fact, if you had invested in a portfolio that held each of these in equal weights back before the financial crisis hit, your portfolio would have increased by more than 83%, compared to just a 9% appreciation in the S&P. This is not stock investment advice, after all a well-diversified portfolio is always the best option in the long run. However, this is important because nutraceutical stocks not only faired better during the 2008-2009 market decline, but they also recovered faster and better than the broader market—which begs the question, why have these stocks performed better? 
 
Yes, one could argue that the nutraceutical business is somewhat recession proof because in the period before the crisis consumer interest in and awareness of nutraceuticals were growing rapidly. Furthermore, during the crisis the logic was that consumers felt like they needed to stay healthy as a way of managing their own personal risk. However, not all of the share prices of the companies in the table increased. All of the companies with market values greater than $350 million outperformed the S&P, but only one of the four smaller companies was able to achieve a positive return. The bigger the nutraceutical company, the more likely it was to outperform during the last four years.
 
This is indicative of a broader industry trend. The big companies in this industry are mostly getting bigger, while the smaller companies are having difficulty building a competitive advantage. Most of the companies that have done really well have clear strategies for growth that make sense and are attractive to investors. Whether this means acquiring companies with high brand equity (i.e. Schiff), launching new products in complementary markets (i.e. Smart Balance), or investing heavily in new markets (i.e. Nu Skin), if a plan can be understood well enough by the markets, then it usually indicates a company is focused and disciplined.
While it would be nice to say that all nutraceutical stocks are likely to outperform the market, really what this data says is that companies who want to succeed in the nutraceutical markets need clear strategies for growth and will be rewarded for executing on that strategy.



Adam Ismail is the executive director of the Global Organization for EPA and DHA Omega-3s (GOED), Salt Lake City, UT. He previously worked in business development, mergers and acquisitions, and business strategy at Cargill Health & Food Technologies, Health Strategy Consulting and Health Business Partners. He can be reached at adam@goedomega3.com.


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