ebook essays pieces of the puzzle
Tuesday, July 19th, 2011
our daily bread



Two things led to this edition of pix:

I was at a conference at which the attendees gave short talks and one I liked was about simplifying the investment screening process.  To illustrate the importance of getting to the essence of an approach, the presenter gave brief descriptions of very complex things from other disciplines.  One was basically, “Our evolutionary biology and the foods that we eat are at odds with each other.”  He indicated that as a result the diet that he followed was similar to the Atkins diet that was popular a number of years ago.  (He looked to be in great shape.)

Subsequently, I saw a tweet that said something like, “McDonald’s serves sixty million people a day in the U.S., half of whom are obese.”

The business of serving meals outside the home has been quite good for McDonald’s (MCD) and Panera Bread (PNRA), despite the retrenching consumer (as referenced in yesterday’s posting).  I wanted to include a line in the chart above showing the general increase in the Body Mass Index, but I couldn’t find the data.  (But I did find this PDF on obesity.)

Without regard to discussions about obesity, the turnaround at MCD since 2002 has been remarkable, coming on the heels of many years of weak performance.  In contrast, the three years prior to the start of this chart were gangbusters for PNRA.  But note the little stretch of underperformance for that stock starting in the second half of 2003.  That was when the Atkins diet was at its peak of popularity and the firm was being asked by analysts how its business could stand up to the threat.  A very popular idea was to take “Bread” out of the company’s name (just as many firms had added and then removed “.com” from theirs in response to the popularity and then unpopularity of that suffix).

I had two students who proposed buying PNRA that fall for the real-money investment fund that they ran as part of their graduate training.  The last step of the process was getting it approved by a group of experienced analysts and portfolio managers.  Despite the students’ best efforts, they couldn’t convince the professionals that the company could succeed in the face of the popularity of the Atkins diet.  In its own way, that was a tremendous lesson for them.

These stocks and the trend toward a more obese populace seem unstoppable now, but it’s probably wise to consider the depth of belief in them and the ramifications should they reverse.  (Chart:  Bloomberg terminal.)