👩‍🦰 Red Head Rally?

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REVIEW

US stocks were mixed on Friday amid the rising rate environment. Traders continued to make moves in response to the Fed’s hawkish policy shift that’s likely to include several rate hikes before the end of the year. Some market observers say investors are now pricing in what is expected to be a more aggressive approach to inflation, in terms of how and when rate hikes are enacted. The benchmark 10-year US Treasury yield jumped to 2.5% in a new multi-year high. Investors are keeping close tabs on the Russian invasion of Ukraine, which has roiled commodity markets, with the price of oil being particularly volatile in recent weeks. A potentially significant development unfolded Friday when the European Union struck a deal with the US concerning natural gas, which could reduce dependency on Russian fossil fuels. President Biden also huddled with leaders in Europe and said if Russia uses chemical weapons, NATO will respond. On the economic front, the National Association of Realtors says pending home sales fell by 4.1% in February from January. This marked the fourth straight decline for the pending home sales index, all while the housing market enters the typically busy spring season. Analysts say rising mortgage rates are one potential factor. In company-specific news, bank stocks Wells Fargo and Bank of America moved higher, as lending institutions tend to perform well when interest rates rise. Chinese electric vehicle company Nio beat analyst expectations for revenue in the current quarter. The company has been facing challenges lately in China tied to production disruptions and lagging consumer demand. Bed Bath and Beyond saw its share price move higher after word broke it had reached a deal with activist investor Ryan Cohen. On the flip side, technology infrastructure company Switch slipped, after a report indicated a buyout is possible. For the week as a whole, the Dow Jones Industrial Average rose 0.3%. The S&P 500 climbed 1.8% and the Nasdaq Composite gained 2%.

PREVIEW

Tomorrow, the US Census Bureau and Bureau of Economic Analysis will release the advance report on February's trade in goods, which tracks the country's imports and exports. In January, the revised goods and services deficit came in at $89.7 billion, which was up $7.7 billion from the previous month.

On Tuesday, the Job Openings and Labor Turnover Survey (JOLTS) report for February is due. Broadly speaking it looks at job openings and resignations. January’s report showed 11.26 job openings, which was more than the 10.9 million economists had predicted. Job resignations fell to 4.75 million in January, the lowest number since October 2021. Also, be on the lookout for January’s Case-Shiller national house price index and the FHFA national house price index, as well as March’s consumer confidence index.

Wednesday, ADP will publish its employment report for March. In February, the economy added 475,000 private sector jobs, exceeding expectations. The revised fourth-quarter GDP, gross domestic income, and corporate profits reports are also set for release.

Thursday, the Personal Consumption Expenditures Price Index (PCE) for February is due. It’s considered the Fed’s preferred inflation gauge despite being less well known than the CPI. The PCE aims to track how consumers change their spending habits amid rising prices. January’s index rose by 6.1% year-over-year, the biggest increase since February 1982. Similar to the CPI, as the PCE index increases, prices are rising in accordance with inflation.

Friday, February’s construction spending will be released, as well as March’s unemployment rate, non-farm payrolls, and motor vehicle sales. Nonfarm payrolls jumped by 678,000 in February and the unemployment rate fell to 3.8%. This reading beat expectations of 440,000 and 3.9%, respectively. 

Here’s what’s on deck for this week’s earnings reports:

Monday, restaurant and video arcade company Dave & Busters (PLAY) will post its most recent results, after its earnings per share beat analyst estimates by 75% in the third quarter of 2021. Tuesday, pet products ecommerce giant Chewy (CHWY) will report earnings. Analysts are expecting a decline in earnings for the fourth quarter of 2021. On Wednesday, BioNTech (BNTX) will hand in its latest report card. The German biotech company will be sharing results for both Q4 2021 and the last year as a whole. Thursday, Blackberry (BB) is set to report earnings. The Canadian software company recently announced that its Blackberry Radar has been integrated into ISAAC Instruments’ Open Platform, which helps tractor-trailer companies manage their fleets. Finally, on Friday, cannabis stock ICANIC Brands (ICNAF) will share its most recent results.

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Should Investors Add Wendy's to the Menu? Wall Street Thinks So

Red Head Rally?

Fast-food stocks have fallen out of favor with some investors amid increasing operating expenses and high labor costs. When you add in the fact that consumers are dealing with sky-high gas prices and seem to prefer eating at home these days anyway, it's not a surprise some fund managers have lost their appetite for fast-food chain stocks.

Despite some sour sentiment, one fast-food chain worth considering is Wendy’s (WEN). With little international exposure, and accelerating sales, the stock could prove appealing to some. Plus, it’s currently underperforming its rivals, offering a potentially attractive entry point for those looking to buy. 

Wendy’s a Domestic Play 

Unlike rivals that have a big international footprint, over 93% of Wendy’s restaurants are located in the US. Its international business is largely concentrated in Canada and the UK, which are generally considered safe havens from geopolitical unrest. 

For this year, Wendy’s is forecasting sales growth across the company. BMO Capital Markets analyst Andrew Strelzik argues the company’s growth will represent a “significant acceleration” from its historical performance. The sales growth is also expected to outpace most of the chain’s rivals.

The idea that Wendy’s is on the upswing doesn't seem far-fetched looking at its more recent figures. In its most recent quarter, it reported same-store sales were up 7.3%, blowing past the 3.8% increase Wall Street was looking for.  

Inflation Not All Bad for Wendy’s 

High-inflationary environments tend to benefit fast-food chains, giving Wendy’s another potential tailwind. The company is focused on offering value, which tends to be appreciated by consumers within an environment where everything costs more. Over one-third of Wendy’s customers are budget-conscious individuals making $45,000 or less annually.

Wendy’s is also expanding its menu items and doubling down on breakfast, two additional areas of potential upside. In the fourth quarter, breakfast sales increased 10% year-over-year. To try and capture more delivery business, Wendy’s is partnering with ghost-kitchen operator Reef. 

Some investors just don’t have a taste for fast-food chain stocks. Others may want to keep Wendy’s on the menu. At present, the company’s growth is accelerating despite record inflation and global unrest.

Retailers That Could Buck the Slowdown Trend

Discount Retailers and Autoparts Sellers Could Surge This Year

Many retailers are having a tricky time right now. Same-store sales comparisons could turn out disappointing this year, coming off what was a strong 2021.

Gas prices are soaring with Russia’s invasion of Ukraine sending them even higher. Inflation hit 7.9% in February, a 40-year high, putting downward pressure on consumer spending.

Meanwhile, consumers will be shelling out the dollars they do have on an expanded number of options. As COVID-19 restrictions ease, shopping isn’t the only game in town. Going out to eat, seeing a movie, and hitting bars and nightclubs are all back in the mix. On the whole, these trends seem to be spooking Wall Street, prompting analysts to cut estimates for same-store sales at many of the nation’s retailers.

In February analysts were predicting same-store growth of 16.5% for the year. Now it's down to 5.1%. Not every retailer is expected to take a hit. There are a few that are bucking the trend largely because they offer consumers a break at checkout or their products are in demand.

They include Dollar Tree (DLTR), Dollar General (DG), AutoZone (AZO), Advance Auto Parts (AAP), and O’Reilly Automotive (ORLY). Their shares are up despite all the retail sector problems. Let's look at why.

Dollar Tree, Dollar General Could See Same-Store Sales Gain

As prices rise and consumers look for ways to save, they’ve historically turned to discount stores. That means Dollar Tree and Dollar General look like opportunities amid soaring inflation.

Both companies offer steeply discounted products and should benefit as consumers become more conscious of their spending. In the case of Dollar Tree, Wall Street is forecasting same-store sales growth of 4% this year. That’s up from a previous forecast of 1%. Meanwhile, the company recently overhauled its board of directors following pressure from activist investors.

Dollar General’s prospects are also improving in the eyes of some market watchers. After posting strong fourth-quarter results and providing an optimistic outlook for 2022, analysts raised their same-store sales projections to 2.5% this year. The previous expectation had been for comparable sales to decline.

With Aging Cars on the Road, Auto Parts in Demand

Auto parts retailers AutoZone, Advance Auto Parts, and O’Reilly Automotive are also looking at potentially favorable market conditions. They may not offer customers steep discounts, but with limited inventory of new and used cars available, demand for their products and services is expected to increase.

Consumers are holding on to their vehicles longer, and with more people returning to the office, they’re getting more use. That means additional wear and tear that requires replacement parts. This has already been happening, enabling auto parts retailers to report strong quarterly earnings. Analysts are forecasting AutoZone, Advance Auto Parts, and O’Reilly Automotive to all experience same-store sales growth this year.

Most retailers’ numbers are unlikely to look very good when comparing this year to 2021. Due to a number of factors, consumers are likely to be less inclined to spend over the coming months. Discount store operators and auto parts companies may be in a good spot to buck that trend, which could drive their stocks higher, presenting an opportunity for thick-skinned investors.

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Looking for Bargains in Restaurant and Packaged Food Stocks

Inflation Wreaking Havoc

With food prices skyrocketing and inflation at its highest level in 40 years, investors can be forgiven for staying away from restaurant and packaged food companies.

Consumers have less discretionary spending in a high-inflation environment, meaning less money is available for dining out. Meanwhile, packaged goods companies have to absorb higher operating costs while crossing their fingers that consumers will be willing to pay more. 

Stocks in those two industries have been taking a beating recently, but now they may present a buying opportunity. When considering companies like Bloomin’ Brands (BLMN) or Starbucks (SBUX), some Wall Street watchers argue the selloff is an overreaction. Andy Barish, an analyst at Jefferies, thinks demand is still strong and that revenue will increase as prices rise.

Casual Dining Sector on Rebound

Barish says the casual dining sector is in its best shape in 20 years. That’s partly thanks to a decline in standalone restaurants due to the pandemic. Many casual dining restaurant chains improved margins by making menus less complicated, expanding takeout offerings, and installing kiosks for automated ordering. Bloomin’ Brands, which went by Outback Steakhouse in the past, is one opportunity some investors are exploring. Analysts contend the company has improved its quality, and it pays a dividend that yields 2.5%. 

Another name to watch is Brinker International (EAT), the owner of 1,665 Chili’s and 53 Maggiano's Little Italy restaurants. It’s been doing well during the pandemic recovery period. It's also trading around nine times its projected 2022 calendar year earnings, which is a discount compared to some of its peers.

Starbucks’ share price has taken a hit recently after cutting its guidance for the current fiscal year in February. It now expects growth of between 8% and 10%, below its previous target of 10% to 12%. 

The coffee-chain operator blamed inflation and slowing business in China due to COVID-19. Barish of Jefferies thinks a good entry point is when the stock’s forward price-to-earnings ratio is near 20. It almost got there earlier this month but then surged higher on the news former CEO Howard Schultz will return for the third time, on an interim basis.

Pricing Power on Display 

On the packaged foods front, companies have been getting hit by higher input costs, which have hurt the bottom line. Due to the nature of their relationship with retailers, it takes time to increase prices, which is why margins got squeezed late last year.

Credit Suisse analyst Robert Moskow thinks Hershey (HSY) is one packaged foods company that could thrive. He argues the company has a lot of pricing power, and Hershey expanded sales during the pandemic. The iconic candy maker is forecasting 9% to 11% growth in 2022. Last year's earnings grew 14%.

Hostess (TWNK), maker of Twinkies and other packaged snacks, seems to be benefiting from the eat-at-home trend. The company is gaining market share and grew profits 17% last year. For 2022, Hostess is targeting growth between 6% and 11%.

Restaurants and consumer packaged food companies have been on the downswing as inflation soars. The companies that have been able to absorb the price increases may look like a bargain, especially if those input costs start to come down.

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.