Walmart’s CEO, John Furner, recently sent a shiver down Wall Street’s spine.
In a recent interview with Bloomberg, the main worry Furner expressed wasn’t about rising interest rates…
His focus wasn’t on a dysfunctional government or rising geopolitical uncertainty…
And he wasn’t talking about record national debt, either…
Instead, Furner was talking about the negative impact of the new blockbuster drug, Ozempic, on consumer spending habits.
His recent commentary on the drug caused a major selloff in the Consumer Staples sector.
The Vanguard Consumer Staples Index Fund ETF (VDC) is down by 7.7% during the last month alone.
The S&P 500 is only down by 2.5% during the same period.
At Wide Moat Research, we’re always looking for market developments we can use to our advantage and boost our income.
So today, we’ll break down what this drug represents, why it’s got some of the most successful businesses spooked… And whether this is something we should be concerned about over the long-term – or an overreaction we can take advantage of.
The Consumer Products Boogeyman
Ozempic is a popular drug doctors are prescribing to millions of patients to fight obesity and diabetes.
The Food and Drug Administration (FDA) approved Ozempic for weight-loss treatment in 2021. And since then, sales have soared.
CNBC reports that in the first six months of 2023 alone, Ozempic sales have grown by 58%.
Novo-Nordisk (NVO), the company that makes the drug, just increased full-year sales growth estimates for Ozempic in 2023. It raised its forecast from 27-33% to a new range of 32-38%.
This caused NVO shares, which are up over 90% over the past year, to rise to new all-time highs.
But this has some consumer staples companies fearing the worst. Here’s why…
Ozempic works by mimicking naturally occurring hormones and tricking the brain into thinking you’re full.
And according to Walmart’s data, it’s working.
Walmart can track prescription data and has studied the spending habits of consumers using diabetes drugs like Ozempic.
And compared to its total customer base, Furner said this group’s baskets have “less units, slightly less calories.”
This issue isn’t just impacting Walmart.
Business Insider recently noted that mentions of the word “Ozempic” in consumer product company earnings calls and documents are up by 228% during the last 90 days.
And Morgan Stanley estimates that the number of people taking drugs like Ozempic could rise from 9 million today to 24 million by 2035.
Fearing the impact this will have on snack sales, it makes sense the consumer staples sector has taken a hit recently.
But we’re going to look at the bigger picture… And we believe now is a great time to buy beaten-down consumer staples stocks.
Consumer Staples Outperform During Recessions
Today’s economic conditions are converging to create a unique scenario.
Interest rates are rising… Economic growth is slowing… Demand in the housing market has crashed… And it appears that a recession might be the only thing to solve the stubborn inflation problem.
I can’t predict exactly when the next recession or market crash will occur.
No one can.
But I do know that consumer staples have served as safe havens for investors during tough economic times… And that isn’t going to change anytime soon.
No matter how bad things get from an economic standpoint, consumers still need to buy things like soap, toothpaste, deodorant, toilet paper, and diapers.
And even if we face certain drug trends that will slow down growth in some types of discretionary goods… The overall sector is a necessity for day-to-day life.
This is why the biggest companies in this sector tend to maintain sales and earnings during recessions. And that allows them to experience less volatility during bear markets.
For instance, the largest company in the Vanguard Consumer Staples ETF, Procter & Gamble (PG), increased its earnings during the Great Recession.
From 2007-2009, PG’s earnings-per-share (EPS) grew from $3.04 to $3.58.
And during the COVID-19 crash of 2020, its EPS rose by 2%.
Looking at the top holdings within VDC, you’ll see similar histories when you look at the long-term trends…
These five stocks make up nearly 50% of the Vanguard Consumer Staples ETF. And despite the market volatility of the past few years, they’ve all proven to be Sleep Well At Night (SWAN) companies.
And best of all, they all have long histories of fundamental and dividend growth.
The Ozempic news is hurting the sentiment surrounding them. But long-term, I think they’ll all be fine.
That’s because these companies have been through decades of trends coming and going. And they’ve adapted to survive.
The companies that have developed the widest moats will continue to do the same. Take Walmart, for example.
In the aftermath of Furner’s comments, the company’s findings made one thing clear: Ozempic doesn’t lower consumer spending.
Even though the people on diabetes drugs are spending less on food, their spending has increased overall.
Walmart’s data shows increased spending at the pharmacy. Not just for prescription drugs, but also on over-the-counter drugs to combat common side effects of drugs like Ozempic like nausea and diarrhea.
So it’ll adjust its strategy to keep growing its earnings.
There’s nothing exciting about consumer staples… They’re typically mature companies that use their reliable cash flows to pay shareholder dividends.
But as we’ve seen over the past few years, boring stocks can still make you rich.
One easy way to get exposure to consumer staples is the beaten-down Vanguard fund.
Since its inception in 2004, VDC has generated annual returns north of 9%.
VDC shares currently yield 2.7% and have a five-year dividend growth rate of 5.6%.
Thanks to its recent pullback, we think this is a great chance to pick up shares before they take off again for one big reason…
We expect to see interest rates fall during the next recession. That’s because cutting rates is the biggest bullet the Federal Reserve uses to combat negative economic growth.
And when that happens, the stocks in VDC’s basket will become even more attractive due to their safe – and growing – dividends.
So take advantage of this opportunity in consumer staples while it exists.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily
P.S. As I mentioned above, I’m always looking out for developments in the stock market to take advantage of. And I’ve developed a unique system to earn income from some of the most reliable companies on the planet.
To join me and learn more about these SWAN investments, watch my recent presentation on this income-generating opportunity here.