🥗 The New Chipotle

Happy Sunday to everyone on The Street.

The week before this past one was strange. The midweek July 4th holiday threw everything off. Some people were working on Monday and Wednesday. Other people were "logged in" but in reality, they were checked out. Next year is a leap year, so July 4th skips Wednesday and will fall on a Thursday, which will be much better.

One thing that went largely unnoticed last week, which I thought was interesting, was the divergence between Main Street and Wall Street when it comes to equity investing.

According to Morgan Stanley, retail investors bought roughly $7 billion of equities, a near-record appetite for stocks not seen since 2016. Meanwhile, hedge funds quietly trimmed their exposure. This could have been done for multiple reasons: Q3 repositioning, taking profits off the table ahead of an anticipated pullback, etc. Maybe some traders are just trying to lock in gains before they bounce in August. I have no idea.

Nonetheless, it's always interesting to compare the purchasing habits between retail and institutional investors, especially when magic eight balls for both keep saying "ask again later" when it comes to predicting what’s next for the markets.

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Review

US stocks finished mixed but mostly higher Friday after a handful of big banks reported better-than-expected earnings.

JPMorgan Chase’s report exceeded analyst expectations due to higher interest rates and better-than-expected bond trading results. The bank's net income surged 67% to $14.5 billion, while revenue rose 34% to $42.4 billion. JPMorgan's retail banking division was its main source of strength this quarter, with profits surging 71%. The bank's CEO Jamie Dimon warned of, quote, "salient risks in the immediate view," including dwindling consumer balances and the risk that interest rates would be higher for longer than expected.

Meanwhile, Wells Fargo posted similar results, beating Wall Street estimates on both the top and bottom lines. The bank's total net income was $4.9 billion, up from $3.1 billion in the same quarter last year. Higher interest rates helped fuel the increase, with net interest income rising 29% year-over-year to $13.2 billion. However, the bank reported quarter-over-quarter declines of 2% for commercial and consumer deposits.

On the economic front, the University of Michigan consumer sentiment index increased for a second month to 72.6 in July, the highest level since September 2021, and well above forecasts of 65.5. Both current economic conditions and consumer expectations improved, largely attributed to an easing of inflation and stability in labor markets.

In company-specific news, Eli Lilly is set to acquire Versanis, a privately-held obesity drug maker for up to $1.93 billion, in a strategic move to expand its weight loss treatment portfolio. Versanis's experimental drug, bimagrumab, aimed at reducing fat mass, complements Eli Lilly's ongoing research on obesity treatments. This consolidation occurs as the global weight loss drug market is anticipated to surge to a value of $100 billion by 2030.

For the week as a whole, the Dow posted its best performance since March, adding 2.3%. The S&P 500 gained 2.4%, and the Nasdaq rose 3.3%.

Preview

Tuesday will see the release of June reports for both retail sales and industrial production. In May, retail sales rose 0.3% from April while industrial production decreased 0.2%. Additionally, the housing market index will be released. In June, this metric signaled positive builder confidence for the first time in nearly a year thanks to solid demand, lack of existing inventory, and improved supply chain efficiency.

On Wednesday, an update on building permits for June will be released. In May, building permits increased 5.6% to just under 1.5 million. Investors will also get an update to the 30-year fixed-rate mortgage, which currently sits just above 7%.

On Thursday, investors will learn how many Americans filed for unemployment last week. For the week that ended July 8, roughly 237,000 Americans filed their initial jobless claims, a decrease of 12,000 from the week prior. Additionally, data for existing home sales in the US will be released. In May, the number of existing home sales increased just slightly by 2.3%.

Earnings Spotlight

The earnings week will kick off strong on Tuesday, following Bank of America’s call with a flurry of financial reports from Bank of NY Mellon (BK), Charles Schwab (SCHW), and Morgan Stanley (MS). Charles Schwab will likely address a recent data breach impacting thousands of clients. Beyond the finance space, Lockheed Martin (LMT) will update investors as well.

On Wednesday, Ally Financial (ALLY) and Goldman Sachs (GS) will keep financial earnings reports flowing. Also, Netflix (NFLX) will discuss its second-quarter results. Investors eagerly await news of the streaming giant’s fledgling plans to get into the video game business.

On Thursday, Capital One (COF) will keep the finance-heavy week rolling, while both American Airlines (AAL) and United Airlines (UAL) will fill investors in on the state of the skies. American Airlines could expound on the end of its deal with JetBlue (JBLU). The ticket partnership between the two airlines is set to end July 21 after a judge ruled it anti-competitive in light of the pending merger between JetBlue and Spirit Airlines (SAVE).

On Friday, American Express (AXP) will cap off a week of financial earnings. Amex’s report could clear up rumors on whether or not it plans on taking over Apple’s (AAPL) credit card and savings products from Goldman Sachs.

Summer Travel is in Full Swing: Here’s How to Play It

Record-Setting Travel Days

Whoever said consumers are pulling back on travel hasn’t looked at the results of the past July 4th weekend. A new record for the busiest air travel day was set on Friday, June 30th. Over the holiday weekend, new travel records were made in airports nationwide.

It's not domestic travel that's driving the growth, however. Demand for international destinations is booming, presenting an opportunity for travel stocks with an international bent.

Hotel and Cruises Poised to Benefit

Take Hyatt (H) for starters. It’s a top pick for Truist analysts because 30% of its earnings are from Apple Leisure Group, which has a big concentration in the Caribbean. It's also expected to benefit from demand in Europe. Airfares from the U.S. to Europe are at their highest price in five years while room rates in hotels in London were up close to 20% in May.

Cruise lines provide another potential opportunity. These stocks, including Royal Caribbean (RCL), Carnival (CCL), and Norwegian Cruise Line (NCLH) have already made a nice run this year. In the case of Royal Caribbean, Stifel analyst Steven Wieczynski thinks shares can gain another 17% in addition to the 107% it increased so far in 2023. Even with consumer spending softening the analyst thinks there is two to three years of backlog due to pent-up demand.

Don’t Forget Airline Stocks

As for airline stocks, analysts favor the ones that have a big international presence including United Airlines (UAL), Delta Air Lines (DAL), and American Airlines (AAL). All three are up double digits but Bulls think Delta can gain another 19% and United an additional 18% this year.

Domestic travel will likely do well, but as Axios alluded to this past week, “The Eurotrip is back, no matter how much it costs.” With that said, travel stocks with international exposure could outperform in the current environment even if they are pricey.

It’s Time to Update the Electrical Grid. Here’s a Stock to Watch

Inflation Reduction Act to Power Grid Upgrades

The Biden administration’s Inflation Reduction Act, which was signed into law earlier this year, is expected to be a boon to companies upgrading the power grid. Quanta Services (PWR), in particular, is one name to watch.

The company, hailing out of Houston, plans and implements infrastructure projects for sectors that should benefit from the new law including electric power, pipelines and telecommunications. About $350 billion in funds is earmarked for investments in green energy and overhauling the power grid.

UBS, which has a buy rating on the stock, recently upped its price target to $228 per share, from $195. On Friday shares closed at $196.13.

New Green Phase

The way UBS analyst Steven Fisher sees it, investments in the electric grid are entering a phase in which renewable activity is picking up steam and large transmission projects are growing. That, says the analyst, should translate into faster top-line growth for Quanta as well as the potential for higher margins and bigger projects.

“In our view, some large projects can carry more risk factors, but we observe Quanta taking steps to mitigate risk, including doing more engineering work, increasing control over procurement, and being more selective with customers/projects,” Fisher wrote in a recent research report.

Gross Margins to Get a Lift

Outside of large transmission projects, Quanta should also benefit from projects to update power grids in Oregon, Colorado, and Wyoming. Combine these initiatives and the Wall Street firm thinks the higher mix of large transmissions and solar projects could add 40 to 50 basis points of margin upside to its electric and renewables businesses.

Money is pouring into the power grid thanks to new legislation. Quanta may be one stock worth adding to your due diligence list.

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The New Chipotle

Bulls Like These Bowls

Cava (CAVA), the fast-casual restaurant chain serving up food with a Mediterranean flare, is on the menu for many Wall Street analysts following its stock market debut in June.

All of the analysts covering this Chipotle (CMG) lookalike expect shares to gain, with Baird at $50 per share, the highest price target, according to Bloomberg data.

Bulls think the company is poised for outsized growth. D.C.-based Cava is aiming to have over 1,000 restaurants around the country in the next ten years but analysts think there can be more. Jefferies argues Cava can get to Chipotle level’s with about 7,000 stores in North America.

The Next Chipotle?

That’s not where the Chipotle comparisons end. Bulls think its stock can perform like Chipotle, which has doubled so far this year.

It’s “the most successful fast-casual brand to date, and provides a template for what the bull case could look like for Cava over the coming decades,” wrote Morgan Stanley analyst Brian Harbour in a recent research report.

When Cava debuted in June shares soared 99% from the IPO price, giving it a market cap of $4.9 billion. Shares are up 80% since then and Cava sports a $5.3 billion market cap.

More Opportunities to Get In

Despite the nice run Morgan Stanley’s Harbour says there will be opportunities for investors to get in on the stock. When? According to Harbour when the company gets to the 350-500 store range. That will provide more proof points the business model is working and help Wall Street build better forecasts.

“Even for Chipotle, Cava’s bull case comp, there were bumps along the way that created entry points for long-term investors,” wrote the analyst. Bulls are excited about the bowls being served up at this new fast-casual entrant.

Last Week's Poll Results

Which stock do you think will underperform over the next 3 months?

🟩🟩🟩🟩🟩🟩 CMS Energy

🟨⬜️⬜️⬜️⬜️⬜️ DTE Energy (DTE)

🟨⬜️⬜️⬜️⬜️⬜️ WEC Energy (WEC)

What do you prefer: mortgage-backed securities or corporate bonds?

🟩🟩🟩🟩🟩🟩 MBS

🟨🟨🟨⬜️⬜️⬜️ Corporates

Are you bullish or bearish on Rockwell Automation over the next 12 months?

🟩🟩🟩🟩🟩🟩 🐂 Bullish

🟨🟨🟨⬜️⬜️⬜️ 🐻 Bearish

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