Where’s the Beef?

Are non-beef burgers the next big thing? If you followed financial pundits lately, you might think so, with many hyping investing in pure-play non-beef burger makers. The “alternative meat” space in general has been looking tasty to investors hungry for the potential gains from non-meat “meat” producers. In our view, investors should take caution when headlines salivate over the latest investing fad—ordering up alternative meat stocks due to hype strikes us as heat-chasing, a common investing mistake.

Non-meat “meat” products have been generating interest in recent years, with proponents citing several advantages. Some point to the environmental benefits, arguing deforestation for livestock (not to mention the animals’, um, methane emissions) is contributing to climate change. Cutting down on animal consumption can purportedly help. Others cite the health risks of eating red meat, with plant-based proteins offering an allegedly healthier alternative. For most consumers, though, the biggest hurdle has been taste. Historically, a “fake meat” burger hasn’t matched the tastiness of a good ol’ traditional beef burger.^[i] But some companies have made strides with non-meat burger patties and other products that mimic the taste and texture of real meat—even “bleed!” With non-meat options gaining traction nationally, investors have been sniffing around for opportunities in this space—especially after one plant-based protein producer’s sizzling Wall Street debut.

Before biting into this investment space, consider what you are buying. From a high level, a food product company traditionally falls under the Consumer Staples category. Consumer Staples’ “Food Products” subsector—which includes giant multinational companies with an array of businesses, including meat production—comprises just 2% of the MSCI World Index’s market cap.^[ii] Typically, such firms perform best in weak markets, though whether that holds for a newfangled niche non-meat firm is anyone’s guess. Anyway, if it does, we think it is unlikely to mesh with the continued bull market we expect. From a portfolio construction perspective, loading up on stocks that represent an infinitesimal slice of one segment of one subsector of a broad market group seems unnecessarily risky to us.

For all the apparent solutions alternative meat offers, an equal number of questions arise. Despite outsized attention today, the alternative meat business barely registers in the broader meat industry. According to a Barclays report, faux meat is less than 1% of the $1.4 trillion global meat market—it has a long way to go before making a meaningful industry impact.^[iii] Alternative meat producers also aren’t aiming for the seemingly obvious target: non-meat eaters. Vegetarians and vegans have myriad reasons for refraining from meat consumption, with some as straightforward as not liking the taste of meat. Even if non-meat consumers were the target, they aren’t a huge market. Per a Gallup survey, only 5% of Americans identify as vegetarians, while only 3% identify as vegans.^[iv] Restaurants are offering alternative meat burgers not for these consumers, but rather, for current meat eaters. These options tend to carry a higher price tag—a sign the Highly Unlikely Burger^[v] you see on the menu is more a luxury item than a viable mass replacement for meat right now.

The other rationales for alternative meat also have counterpoints. Yes, reducing livestock cultivation could help conserve farmland and reduce greenhouse gas emissions while easing concerns about excess manure polluting waterways. But plant-based food creation isn’t purely “green,” either. Rising demand for palm oil—an important ingredient in plant-based products—is encouraging deforestation. Creating lab-based meats requires a lot of energy, which can be detrimental to the environment. Health-wise, reducing red meat consumption may have certain health benefits (e.g., lower cholesterol), but that doesn’t make a faux meat burger healthier than its beefy counterpart. Non-meat “meat” is still a processed food and can have higher sodium and saturated fat content—and caloric count. Alternative meat could have a viable long-term future, but in our view, the thesis to buy faux meat makers looks half-cooked today.

To us, alternative meat producers seem like the latest in an illustrious line of industries purported to be The Next Great Investing Opportunity. Those wanting to get in now risk chasing heat and buying based on hype, rather than fundamentals. Though non-meat “meat” may be the bee’s knees now, the bull market has seen myriad examples of “can’t miss” investing opportunities. Remember when investors thought 3D printing was akin to printing money? Or when only a dummy couldn’t see artificial intelligence (AI) was the future? Or when cannabis companies were the ticket to send portfolios higher? Or when blockchain was the next Internet? Or when yoga pants were the path to enlightened portfolios?   

While the details differ, the overarching theme is the same: An eye-grabbing innovation supposedly offers a tremendous growth opportunity, and investors should buy now or miss out—and regret it forever. But hype isn’t a sensible thesis to buy, in our view. Markets price in all widely known information. They are well aware of how far meat alternatives have to go before taking a meaningful bite out of the meat industry. Those with sky-high expectations for budding beef replacements may be disappointed if progress doesn’t come as they anticipate.

Moreover, the pure-play alternative meat companies may not be the biggest beneficiaries from a potential shift in consumer tastes—established firms could end up being the biggest winners. The largest US meat producer is already making some forays into the meat-replacement business. Considering existing advantages—e.g., infrastructure and production capabilities—the best way to benefit from a potential non-meat “meat” shift might be to own the big boring company. Less sexy, but quite possibly more substance.

We don’t know who the winners and losers will be in the non-meat “meat” wars, but if you are a long-term, growth-oriented investor, you don’t need to find the proverbial needle in the haystack. Your asset allocation matters more than trying to find the next big stock—meatless or not.

H/T: Fisher Investments Research Analyst YoungRo Yoon