The Hidden Trade Behind a GLP-1 Boom

Every investment boom creates an equal and opposite opportunity.

We already saw this happen once.

As capital flooded into AI infrastructure, it quietly flowed away from enterprise software and even started shorting it as a hedge.

That divergence created one of my favorite opportunities of the year!
Which led me to dive deeper into one of the most hated software names: Adobe.

Now I think another one is developing…

This time, it isn’t happening inside tech or AI stocks.

It’s happening in the consumer products space.

At first glance, that opposing relationship makes a lot of sense. The more people choose the weight loss route, and consume less of these drinks and snacks…

Naturally, one group rallies while the other falls.

But, markets have a tendency to take a good story too far into the future.

The question isn’t whether GLP-1 changes consumer behavior (it already has.)

The question is whether investors have already priced in more future change than reality will actually deliver.

Zooming out,

I think a lot of this timing will be exposed to inflation, consumer trends, and overall supply of weight loss products out there.

Every major pharmaceutical company is racing to build weight loss manufacturing capacity and inventory.

I believe we could be set up for a potential oversupply scenario from here, where:

If that happens, the biggest opportunity may not be in the next weight loss drug.

It may be in the companies the market has become overly pessimistic on.

That’s why I think,

This is the Hidden Trade Inside a GLP-1 Boom:

You often find the best opportunities when market mechanics break.

Right now, it seems to be breaking within the healthcare and consumer staples space, represented by the XLV and XLP ETFs respectively.

Notice that their betas are very similar in terms of which factors drive their price action.

Which also means, in a market like today’s, they should ideally move together in near lockstep.

Unless something changed in one of the biggest betas in the list:

Before the GLP-1 boom came along, there wasn’t much growth to be expected out of the healthcare sector, and now fuel is being added to the fire when you consider the robotics promise that surrounds it.

Not to say either of these narratives won’t bring outsized growth, in fact I am researching a medical robotics company as we speak.

But,

What I am saying is that the fundamentals of the entire sector changed entirely, and we must divide it between the two narratives above.

Today’s focus is on the GLP-1 boom, since it’s the one that created the clearer spread trade setup.

Based on this divergence, led by the GLP-1 boom and adoption, I decided to make a basket to express each trade.

On the consumer side:

On the GLP-1 Side:

As you can see, most of their price action had collided with the GLP-1 basket outperforming massively since the Iran War breakout dip.

With the weight loss boom going into its third year now, I think the market has had enough time to price in the growth trajectory into stock valuations.

Which is where a correlation analysis comes in handy:

Because of their shared factor exposures, correlations are bound at short-term cycle extremes.

Now that rolling correlations have collapsed toward the negative end of the spectrum, the expectation is for these factor forces to bring them back together.

Unless the GLP-1 and robotics growth theme effectively breaks the healthcare sector’s fabric and market exposure.

Now a correlation swing does not mean a direction guarantee, so here are the potential outcomes we are faced with:

I am betting on scenario #1 here, as betting against the early robotics and GLP-1 growth could be a futile approach.

Simply put,

The reason why my consumer basket has declined by this much has to do with inflation and specific consumer trends centered around healthier choices in this weight loss boom.

If that trend is priced in (I believe at this point it is), then we can easily pick up a renewed uptrend to match the true fundamentals as they beat overly pessimistic expectations in coming quarterly announcements.

Now timing this rotation is a separate - much harder - task:

As the factors and correlations show, these two areas of the market tend to converge.

This Z-score spread shows you where the deviation limits tend to happen before a convergence trend.

As of this writing, we are closing in on one full-year of a deviation, usually when these limits tend to end and trigger a convergence (late 2024 - late 2025.)

Based on that convergence setup, and where deviations are today…

It all favors that scenario #1 where the consumer basket takes the lead against the GLP-1 basket.

Now it’s time to break down our timeline and catalysts.

Eli Lilly made a massive breakthrough this year.

The first weight loss pill was released, replacing the slower adoption injection treatment that used to be the go-to for a while.

This not only reduces costs, but can increase the pace of adoption for these drugs and their ease of use.

However,

That was the big catalyst markets were waiting for, and now its here, so there is little room for expectations to keep moving higher and keep building up new catalysts later in the timeline.

It also creates another more important risk:

So now Eli Lilly has wiped out the old GLP-1 product margins with a lower cost solution, and chances are its competitors will develop a similar pill or an even more efficient solution.

Driving margins for everyone involved lower, peaking the boom while at it.

Just in case I’m wrong about this though…

Let’s check exactly which categories are being impacted by the GLP-1 boom.

Snacks as a whole will see a $12 billion drawdown in consumption, representing ~3% of the total category.

Given this is a low margin, volume-based category, a three percent decline in volume can have a significant impact on these companies.

Where I have noticed no change, or even a slight increase, is in the beverage market:

Three years into the GLP-1 boom, here’s how it’s all going…

This is where things begin to look a lot clearer in terms of a trade idea.

If you focus on a multi-national snacks and beverage company, with no more than 50% of revenue coming from the United States.

Then you can stay outside of the biggest GLP-1 market, and see the fundamentals continue to grow at a healthy pace driven by unchanged non-US demand, in countries where GLP-1s have little to no adoption.

For the beverage market specifically,

You should look for a US-centered name which offers hydration, functional, and energy drinks tailored for the weight loss boom as well.

No sugar, no additives, real healthy stuff.

Then I think the market does the following:

I already have specific stocks that passed this filter, and due diligence is being done.

The trade structure will probably be similar to my Lululemon equity + ONON options trade.

Click here to sign up for Offside Premium and receive this trade idea.

Now that the most important catalyst is done for the GLP-1 boom, and now speculation is off to the races in terms of what keeps pushing adoption further…

Several options traders have decided to hedge against a re-pricing risk:

Specifically:

If the positioning logic is to short this consumer basket for every dollar of exposure into the GLP-1 boom trade,

Then it makes sense that a similar software/semis rotation will take place in this space coming up, especially if these options traders are right.

Stay tuned, as I find more evidence to present in my trade structure pitch coming up for Premium members.

In the meantime, here’s the latest Goldman Sachs take on how AI, capex, and volatility have all been affected markets recently, aligning with my oversupply of chips thesis:

Until next time,

OFFSIDE RESEARCH

Against the Tape, Ahead of the Curve.