💨 $13 Billion Up in Smoke

Happy Sunday to everyone on The Street. Last week we included polls below each story, asking whether you were bullish or bearish on the related stock or sector. The results are in and here's what you said:

• On the stock, GBTG: Bullish 50%, Bearish 50%

• On the stock, NAPA: Bullish 75%, Bearish 25%

• On the cruise line industry: Bullish 48%, Bearish 52%

Our question for you this week relates to the Supreme Court's Friday decision regarding abortion.

We ask because we're genuinely curious. We also have many executives on this list who will likely be involved in discussions surrounding the topic. JPMorgan Chase, for example, told workers that it will pay for travel to states that allow legal abortions. We think it would be helpful for them to have a finger on the pulse from as many data sources as possible.

So, while it's always a controversial topic to discuss, it's a necessary one to try to understand. Do you agree with the Supreme Court's decision to overturn Roe v. Wade?

Review

US stocks rose Friday, driven higher by a slightly upbeat economic data release on the final day of the week. According to a University of Michigan survey, consumer sentiment hit a record low of 50 in June.

On the surface, that doesn't seem very uplifting, however, investors took solace in 12-month inflation expectations, which consumers see falling back to 5.3%. Earlier this month projections for the next year called for 5.4% therefore, while not great, the trendline is heading in the right direction.

Wall Street is having a difficult time parsing through consumer sentiment. On one hand, people are out and about spending money on experiences. This includes travel and leisure during the warmer summer months. With that said, there are higher food and energy costs to contend with so analysts lack confidence in how long this give-and-take relationship can last.

Speaking of travel, cruise line stocks outperformed on Friday after Carnival Corporation said booking volumes in its most recent quarter were “nearly double” those posted in the first quarter. Its stock jumped along with competitors Royal Caribbean Group and Norwegian Cruise Lines. This sentiment also helped boost the likes of casino companies like Wynn Resorts.

Meanwhile, in the crypto space, Harmony’s ONE token tanked on the news hackers stole $100 million in cryptocurrency from its Horizon bridge. Bridges allow people to swap assets between blockchains and have proven vulnerable to these types of exploits.

Elsewhere, the FTSE Russell completed its annual index rebalancing on Friday. This realignment impacts the tracking indexes that influence trillions of dollars which usually causes volatility on the days the action takes place. Meta and Netflix were added to the Russell 1000 value index due to the fact their shares have slid this year.

As for the week as a whole, the Dow Jones Industrial Average rose 5.4%. The S&P 500 climbed 6.5% and the Nasdaq Industrial Average advanced 7.5%.

Preview

Tomorrow, be on the lookout for May’s durable goods orders. These include long-lasting manufactured products, including transportation items. In April, new orders for durable goods rose 0.4% to $265.3 billion, which failed to meet analyst expectations. May’s pending home sales index is also due, which is a forward-looking indicator based on contract signings. In April the index declined 3.9% potentially due to rising mortgage rates, which forces more would-be buyers to the sidelines.

Tuesday, June’s consumer confidence index is due from the Conference Board. May’s index slipped from April to hit a three-month low. Analysts blame that on persistent inflation which has weakened Americans’ buying power. The S&P Case-Shiller US home price index will be released for April, tracking the change in prices on an annualized basis. Home prices rose 20% year-over-year in March, despite the recent rise in mortgage rates.

Wednesday, the Mortgage Bankers Association will publish weekly mortgage applications as well as the average rate on a 30-year fixed mortgage. Last week applications for mortgages went up 4.2%, all while the average rate on a fixed loan checked in at its highest level since 2008.

Thursday, the May PCE or Personal Consumption Expenditures index will be released. This is the Federal Reserve’s preferred inflation gauge. In April the core PCE, which strips out highly volatile food and energy prices, rose 4.9% from a year ago. Some economists contend that indicates inflation is slowing. Also, watch for initial and existing jobless claims. Initial claims are down near historic lows in recent weeks as the labor market remains tight.

Friday, the ISM manufacturing PMI and the S&P Global US manufacturing PMI are due for June. ISM’s reading edged up in May which surprised analysts while S&P Global’s May reading showed a contraction. Construction spending for May is also due, after rising 0.2% in April.

On the earnings front, Nike (NKE), Beyond Air (XAIR), General Mills (GIS), Acuity Brands (AYI), and Sodexo (SDXAY) are scheduled to report. We have our eyes on Nike given it's somewhat of a barometer for consumer spending in the retail space. Inflation has stretched many consumers thin, reducing demand, and retail spending declined in May. Reports also emerged last week that Nike is planning a full exit from Russia amid the war in Ukraine.

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Snack on These Three Restaurant Stocks

Inflation Causing a Loss of Appetite

Americans are dining out again, but you wouldn’t know it from the recent performance of restaurant stocks. Despite a double-digit increase in consumer spending on dining out year-over-year, shares of all the major restaurant stocks are down double digits so far in 2022.

The reason: price increases. With inflation running at 8.6%, a 40-year high, investors are concerned. On the demand side, they worry consumers will reign in spending on discretionary items including eating at restaurants. And on the supply side, these establishments are also contending with a higher cost of goods and labor. The combined effect has driven down Wall Street’s estimates for the group in recent months.

Nonetheless, there are a handful of restaurant stocks including Dave & Buster’s (PLAY), Ruth’s Hospitality Group (RUTH), and Cracker Barrel Old Country Store (CBRL), that are still growing and are trading at a discount, presenting a potential opportunity for investors.

Dave & Busters, Ruth’s Hospitality Poised for Growth

Take Dave & Buster’s for starters. Compared to its peers, it has held up slightly better – although still not great – down about 7% year-to-date. It's also trading at about nine times forward earnings, which is the cheapest of the group. Despite PLAY’s poor performance on a non-relative basis analysts expect Dave & Buster’s to report a 25% jump in comparable sales year-over-year in 2022.

Meanwhile, Ruth’s Hospitality Group is expected to have a similar trajectory this year. The company, which owns Ruth’s Chris Steak House, is down 11% year-to-date and is trading at 11.4 time forward earnings. Analysts, however, expect the company to have comparable sales of 17% this year.

Inflation is the Monkey Wrench for Restaurant Stocks

Of the restaurant stocks mentioned above Cracker Barrel is one of the worst performers. The stock is down more than 30% so far in 2022 and is trading at 12.5 times forward earnings. It’s worth mentioning, however, purely due to where it’s trading and projections. Wall Street expects sales to increase 16.4% this year which means many more Double Chocolate Fudge Coca-Cola Cakes will be sold in the second half of 2022.

Now, as with everything in life, the risk surrounding these three stocks must be taken into consideration. If inflation continues to rise and gas prices stay elevated, the two aforementioned headwinds could compound. That could put further downward pressure on the group. If however, these restaurant chains can keep churning out Voodoo Pasta, Country Fried Shrimp, and Porterhouse Steaks, well then they may prove to be a bargain for hungry investors.

If you had $1,000 to buy just one of the stocks below, which one would you buy?

Smokeless Product Race Heats Up

E-Cigarettes in the Lead … For Now

In light of the FDA's decision to ban Juul e-cigarettes this week, we're going to take a closer look at the multibillion-dollar alternative smoking industry.

Vaping is the leading alternative to cigarettes in the US, but it may not be for long. With so much uncertainty around taxes and regulations, there’s room for alternatives.

As it stands, e-cigarettes or vaping accounts for about 7% of the overall nicotine market. In comparison, oral nicotine pouches and heated tobacco sticks each have a 1% share.

E-cigarettes have an edge largely because they are cheaper. They don’t face the same taxes that heated tobacco products and cigarettes do. That may change if the IRS rewrites the tax code to include e-cigarettes in its tobacco-related levies.

Changes Afoot

Regulation is pretty much the defining issue when analyzing alternative cigarette products.

The US e-cigarette market is constantly in a state of flux, as evidenced by the FDA’s decision this past week. To continue selling vape products the manufacturers need the approval of regulators. If flavored e-cigarettes aren't deemed safe, it could be harder to convince smokers to switch, denting sales. Even if smokers don’t care about safety, a full ban obviously makes certain products harder to get.

As it stands, Philip Morris’ (PM) IQOS heated tobacco devices, which will soon be distributed in the US, are among the few non-combustible products to be granted modified risk classification by the FDA. That designation enables Philip Morris to tell smokers its IQOS tobacco sticks have less harmful chemicals. None of the vaping brands can say the same.

Altria’s Ambitions Up in Smoke

For now, vaping is here to stay. British American Tobacco’s (BAT) Vuse brand of e-cigarettes is currently leading the market. On a recent earnings call BAT said vaping will remain the preferred alternative to cigarettes even as more heated tobacco products come to the market.

As for the FDA's decision to ban Juul, this hits Altria Group (MO) especially hard. Altria invested $12.8 billion in Juul at the end of 2018 for a 35% stake in the company. On the private side, Tiger Global still has a $511 million investment in the vape brand. Altria still generates roughly 90% of its revenue from combustible cigarettes. But after seeing $13 billion go up in smoke the company can’t afford to make another bad bet.

Zooming out, although e-cigarettes are the most preferred alternative smoking option they aren't destined to capture the lion's share of the market. Until taxes and regulations are codified Big Tobacco's race for other options will still be heated.

If you had $1,000 to buy just one of the stocks below, which one would you buy?

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Recession Resistant Cloud Cover

One Bright Spot in a Down Market

Tech stocks are having a tough go of it in the current rising interest rate environment. Investors are shunning high-growth but profitless software, consumer-focused e-commerce, and hardware stocks, sending the sector into the doldrums.

Despite the malaise, cloud computing is a bright spot. Demand for cloud computing is growing and expanding as companies look to reduce hardware and software costs and streamline operations. That bodes well for Amazon (AMZN), Microsoft (MSFT), and Alphabet’s (GOOGL) Google, the leaders in the marketplace.

It also presents a big opportunity for Oracle (ORCL), an often overlooked player. The stock has been battered and beaten but that may change.

Oracle’s Eye is on the Prize

Shares of Oracle are under pressure this year over concerns its $28 billion cash deal for electronic medical records company Cerner will cause it to lose focus on expanding its cloud business. Those worries were put to rest when Oracle reported fiscal fourth-quarter results earlier this month.

Revenue increased 10%, marking the best quarterly growth performance in nearly a decade. The increase was driven in part by cloud sales, which were up 22%. Cloud revenue is projected to increase 25% to 28% in the current quarter.

Oracle also had a major win, announcing last week TikTok is sending data from US users through Oracle servers. Other big-name customers include Zoom (ZM), FedEx (FDX), Intel (INTC), and Hertz (HTZ).

Oracle’s Inflation Protection

Oracle is also seen as a way to hedge against inflation. It has inflation-indexed increases built into customer contracts. If costs rise due to inflation Oracle passes these on to customers. Customers tend to be willing to absorb the rate increases because switching software can be costly and time-consuming.

The stock is also cheap compared to rivals including Microsoft. Oracle’s shares trade for about 13 times forward profits, which is less than half of what Microsoft trades for.

Cloud computing demand is growing despite the current negative sentiment on The Street. Oracle may not be the first name that comes to mind, but it’s certainly one to watch moving forward.

Are you bullish or bearish on Oracle?

This communication from The Street Sheet is for informational purposes only. It is not intended to serve as a recommendation to buy, sell, or hold any security and is not an offer or sale of a security. Information contained within should not be perceived as a research report and is not intended to serve as the basis for any investment decision. Any third-party views reflected herein do not reflect the opinion of The Street Sheet. All investments involve risk and the past performance of a security does not guarantee future results or returns. There is always the potential for financial loss when investing in securities or other financial products. Investors should consider their investment objectives and risks before investing.