NTNX - Go Ahead And Buy But Avoid This Major Bear Trap

2023-10-09 00:49:14 ET

Summary

• Snack companies like PepsiCo, Kellanova, and Mondelez have been sold off recently due to concerns about the impact of new diabetes and diet drugs on American eating habits.
• I am skeptical that these drugs will significantly change snacking habits, but acknowledge the narrative is too potent to ignore.
• The snack sector is currently overpriced, and dip-buying in these stocks is likely to result in losses.

The "Bear Trap" in question are the purveyors of snacks

Names like Pepsi (PEP), Kellanova (K), Mondelez (MDLZ), J. M. Smucker ( SJM ) which is buying Twinkies (TWNK), Hershey (HSY), and I am sure there are more, have all been sold off this past week. The notion that with these new diabetes, and diet drugs millions of Americans will deny themselves of Ho-hos and Oreos, or Hagen Dasz for that matter seems far-fetched, however. I believe that this will be a great week for trading as we put the very bad no good month of September behind us, and my thesis of last week stays in place . Meaning that we have likely seen the peak for the 10-Y in the immediate future. This past Friday has conclusively shown that the US can have powerful demand for jobs, and be able to fill these jobs. I won't bore once more about the Fed vastly undercounting the worker pool, which is continuing to grow. Suffice it to say that GDP for Q3 is lofty indeed. The notion that a recession is about to befall us is exceedingly remote for 2023. Whether the long and variable lags finally catch up to us in 2024 is another issue, at some point, we will need to deal with that, but that time is not now. I suspect that all these snack companies will catch a bid this week. Unless you are a nimble trader I would avoid jumping on any of these names or their ilk. I say this because for now, the snack sector is like walking into a hollow full of quicksand. I don't believe any of these names are doomed to failure, not at all but they are mispriced even now. This was once an ultrasafe sector, with reliable growers like PEP but at 29 PE right now I think it is overpriced. This might be temporary but the current narrative that the new diet and diabetes drugs will change American eating habits is a powerful one that needs to be respected

As a natural skeptic, I believe that the reality won't match the imagination with GLP-1 drugs

For myself the GLP-1 narrative is powerful, yet it is too early to understand all the ramifications of mass use of Mounjaro and Wegovy. Two pharma companies that developed these miracle drugs are respectively Eli Lily and Novo Nordisk. I am personally skeptical that these drugs will affect this nation's insatiable preoccupation with snacking. Yet there is a true possibility for GLP-1 drugs, these and whatever new version that comes along in pill form will have such an effect. We know that the US is at a historic maximum of overweight, and it is only logical to assume that the best snackers are among this demographic. We also know that GLP-1 has an effect on neurological receptors and quite possibly directly in the gut (conjecture on my part). I am just guessing here but one of the side-effects noted that one of the side-effects of these drugs is "stomach paralysis" so it follows (perhaps) that GLP-1 receptors are activated there as well. In any case, I don't believe we fully understand how these drugs work, and what the ramifications are as usage moves from about 2 million in the US now. About 40 million Americans are obese, that is definitely enough snackers who become turned off to snacking because they lost the desire for it. I don't think we need to drill down into the statistics and suss out exactly how many will actually be on the drug in five years whether it is for Diabetes type 1 or 2, or Obesity, or vanity. Suffice it to say the narrative has an actual basis. My gut tells me that it will likely be less than currently imagined, whether it be because it doesn't actually work on everyone, that some give it up because of unknown side effects, or that insurance companies will pay for a much smaller subset.

All that said, you must understand that in this case, dip-buying will likely end in losses. PEP at 29 times, and even names like K, or MDLZ at 22 times earnings are above the current average PE in the S&P 500 which includes the magnificent 7. In fact, Alphabet ( GOOGL ) which is known as the most reasonably priced magnificent is at 28.5 times. Between GOOGL and PEP, I am going with GOOGL. The equal-weight S&P500 ETF PE ratio is 17.81, are snack stocks worthy of an average PE? Right now I would say yes. If you want to round it up, let's say 18 times which is still above the historic average for stocks. Even though I am skeptical that snacking will no longer be commonplace or even less common, for now, this is a very powerful narrative that has the convenience of having some real data behind it.

Walmart ( WMT ) using its sophisticated data science tells us that these drugs can impact snacking

Here is a link to NBC News detailing how shoppers under this treatment are buying less food. These are mostly wealthy people not sure how they know that but the implication is they are more likely to be paying for this drug out of pocket. In any case, the highest-calorie foods are processed foods like snacks. These are likely to carry the brunt of this fall-off in intake. You don't need to be totally credulous of this thinking. Perhaps shoppers will purchase less bacon, and deli meats, all that said the focus of the discounting seems to be in the snacks area. Though Conagra ( CAG ) is down about 12.5% from the September high the PE ratio is only 11.74. You see snacks seem to be highly valued with the accepted wisdom that they will have elevated growth and high-quality earnings. Now there is a negative narrative to deal with, and in a rising market traders and investors might be attracted to names that have always been valued higher.

I am just warning you away because, for the foreseeable future, PEP at 29 PE is just not justifiable as a trade or investment. In fact, if PEP does rise above the mid-160s I will get back on the short side again. Yes, I said again, we surfaced PEP, K, and MLDZ for Group Mind investors members at the beginning of the week. I admit the first foray was to get long Puts on K, not even for the GLP-1 narrative but because Kellogg's broke into 2 companies. It has been my experience recently that when companies spin out major pieces of their businesses both parts sell off initially. So naturally I made a downside play on K, I probably would have done better going after KLG, but both did go down. Then the WMT news hit, and I went looking for the highest-value player I could think of and that was PEP. This was on Wednesday, the drop was so precipitous that I was up 40% in a few hours. Naturally, I had to take profits, an option drops that hard, I am afraid it could bounce right back again. My Puts were at the 165 Strike, but I also had some at 160, which I closed the next day just after it broke under 159. By the end of the day, it inched back over to 160, but not before it created a new 52WL at 155. Why am I getting into this level of detail on price? For one, when a beloved stock like this hits a 52-week low, it tends to test that level again as shocked "forever" owners decide that they want to lighten up. So if dip buyers come in and take this name back up above 165, I will be watching intently looking for a new entry point for another downside foray. Why am I so sure that another sell-off is in the offing? Well for one, I have spent a lot of time above explaining why this narrative has legs. Also, these stocks are valued too high in light of this narrative and also historically. PEP is valued extraordinarily high among the snack names, so that is what I am focused on.

Why am I so sure that downward pressure is likely to return on snack stocks?

Mounjaro is not yet approved as a weight-loss drug. The FDA is supposed to approve Mounjaro later this year, since this is the 4th Quarter the FDA can approve Mounjaro any day now. Also, we still have an elevated VIX, and while I believe the market is about to have a fantastic run, that doesn't mean it won't get back to old highs without volatility. So whenever there is downside pressure I am sure PEP will be one of those names to lose ground first. So perhaps one could set up a "pairs trade" Long LLY and Short PEP. However one should try to buy LLY when it is falling since it is already very highly valued. Even so LLY just got upgraded to a 700 price target by Bank of America this past Friday. In any case, I expect that the approval will invite another wave of hard selling. Also, just like no one was really anticipating this tidbit out of WMT, some other news item could bring renewed selling spontaneously. Like I said, I will keep an eye on PEP, even moving above 165 toward 170 might invite renewed selling at this point.

So why am I talking about downside plays recently?

Group Mind Investors always had a long and short approach. Since 2022 (when the service started) it made more sense to concentrate on general hedging since the market was so heavy. Now that the market has had a more bullish trajectory albeit with high volatility, it makes more sense to look for stocks that are vulnerable to the downside. I pride myself on stock-picking, and there is no less skill and likely more skill in locating names that will find sellers rather than buyers. Having a mix of downside trades and successful upside trades and investments is a winning strategy for these volatile times. Unless there is a macro issue that we can anticipate then hedging is the right course of action along with long investments and trades. I hope that makes sense.

So what other trades and investments did I do this past week?

I added shares of Charles Schwab ( SCHW ) to my long-term position. SCHW actually dipped below 49, and luckily I scooped up some. The low was 45 and that was during the Silicon Valley Bank failure so I will buy even more if it gets lower. Rivian ( RIVN ) sold off very hard on the news that they would be issuing convertible bonds. There was a bearish article that revealed that RIVN loses $30K for each car they sell, and they are going to sell 52K units this year. Instead of dumping my shares I added more in my long-term account and added Calls at the 22.5 strike out to March '24. The build quality on their trucks is fantastic and they can sell as many as they build, I believe they will lower costs. I also believe that they will be able to sell their delivery van to other customers besides Amazon ( AMZN ) in 2024, and that should also help them get to a better footing. On the trading side, I added Datadog ( DDOG ) Call options, I added to my Palantir (PLTR), and Nutanix ( NTNX ) calls. I still have AMZN, GOOGL, Nvidia (NVDA), and Uber Tech (UBER), oh and I added Micron ( MU ) as a follow-on to NVDA because you can't build AI applications without it.

I am very optimistic about how this week turns out, yes we have CPI on the 12th, so maybe lighten up before then. However, after this past Friday, I think the CPI will be less important especially since Oil has now dropped through the floor and gasoline prices should start coming down by the end of this week or perhaps more likely the following week.

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