☕ Starbucks’ Secret Sauce

Happy Independence Day Eve to everyone on The Street. This is our favorite holiday of the year, hands down. It's hard to beat a summer day at the beach or the pool, followed by grilling with family and friends, and topping it off with fireworks. This video sums up the sentiment pretty well, we highly recommend you give it a watch before you let the festivities begin.

Before we start, here are the results from our polls last week.

Do you agree with the Supreme Court's decision to overturn Roe v. Wade? 32% said YES, 68% said NO

Restaurant Stocks: You were most BULLISH on Cracker Barrell, followed by Dave & Busters, and then Ruth's Hospitality Group

Smoking Stocks: You were most BULLISH on Philip Morris followed by British American Tobacco and Altria Group (tie).

Oracle: 84% of you were BULLISH and 16% of you were BEARISH.

🦅 With that, have an absolutely wonderful July 4th holiday, let's dive in.

Review

US stocks rose Friday in the first trading session of the second half of the year. The market is attempting to look past the first six months of 2022, which marked the S&P 500’s worst performance since 1970.

Broadly stated, with inflation running up at record highs, investors are concerned about the impact of tightening monetary policy. The central bank continues to strike a hawkish tone in the face of rising prices, leaving some worried the economy could be tipped into a recession.

Energy prices remain volatile as traders attempt to determine the future rate of oil production, and how the war in Ukraine will further impact supply. International benchmark Brent Crude and US standard West Texas Intermediate saw their price per barrel rise to close out the week.

The yield on the benchmark 10-Year US Treasury declined below 2.9%, which is well off its mid-June high of 3.5%.

On the economic front, the ISM manufacturing PMI showed activity declined in May. Meanwhile, US construction spending fell in May, surprising analysts. The number slipped 0.1% after advancing 1.1% in April. It marked the first decline in eight months.

Overseas, June marked China’s best economic performance in four months as the world’s second-largest economy saw its manufacturing and services sector grow for the first time since February. Still, uncertainty remains over the potential for future COVID-19 lockdowns amid Beijing’s “zero COVID” policy.

Elsewhere, the European Central Bank appears to be preparing for its first rate hike in over a decade with eurozone inflation at a record 8.6%.

For the week as a whole, the Dow Jones Industrial Average fell 1.3%. The S&P 500 slipped 2.2%, and the Nasdaq Composite dipped 4.1%.

Preview

Tuesday, May’s factory orders are due. The Commerce Department reported factory orders rose 0.3% in April, after increasing 1.8% in March. Also, the revised number for May’s capital equipment orders will be released. The preliminary number showed a 0.7% advance, despite rising interest rates. June’s total vehicle sales will also be published after the number decreased by 12.6% in May.

Wednesday, the FOMC will release the minutes from its latest meeting. This will provide the market insight as to how the central bank is thinking about inflation and the need for future rate hikes. It also comes as the Fed enacted its sharpest rate hike since 1994 last month, when it increased its target rate by 75-basis-points.

Also on Wednesday, watch for May’s job openings or quits, known as the JOLTS report. Quits have been piling up in recent months amid what economists call the “Great Resignation,” although jobless claims have been inching up over the past month. Investors will be looking for more insight into the labor market with this data point. The ISM services index for June is scheduled for release as well.

Thursday will bring a new set of job market data points. ADP will publish its monthly jobs report for June. In May, private payrolls increased by 128,000. That’s the lowest number observed during the COVID-19 economic recovery. Weekly jobless claims will also be released. Last week’s number declined. That said, the four-week rolling average came in higher than the previous comparable period. May’s foreign trade balance is also due.

Friday, June’s nonfarm payrolls will be published by the Bureau of Labor Statistics. The number increased by 390,000 which exceeded the expectations of economists. June’s average hourly earnings and labor participation rate are also set for release, closing out a week chock full of job market data.

On the earnings front, Sainsbury's (JSAIY), Simulations Plus (SLP), Levi Strauss (LEVI), and WD-40 (WDFC) are scheduled to report. Known for the lubricant that bears its company name, the firm also sells products such as Carpet Fresh, 2000 Flushes toilet freshener, and Lava brand hand soaps. Some analysts argue the company is well-positioned to ride out inflation given things like cleaning products are considered nondiscretionary spending.

Flag This Shirt for July 4th

Few things are better than playing a round of golf with your buddies. It feels even better while doing it in style. But in truth, these red, white, and blue threads flow smoothly no matter the occasion.

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Update your fit this summer. Get The American Boy golf polo at this link.

How to Play the "Refund the Police" Trend

Budgets for Law Enforcement on the Rise

Funding the police is back in vogue again with state and federal governments increasing their budgets for equipment and gear.

That trend bodes well for Cadre Holding’s (CDRE) Pratt division.

The business unit makes a variety of equipment for police departments and public safety agencies including bulletproof vests, handcuffs, radios, holsters, body armor, and other gear.

Cadre claims to be a leading supplier in all of its product categories which puts it at an advantage as budgets for policing increase. For fiscal 2023, President Biden requested an 11%year-over-year increase in funding for federal, state, and local police agencies. Of the $20.6 billion allocated for law enforcement, a portion is devoted to hiring more officers.

Cadre in a Leader Position

“Refunding the police” could be a big deal for Cadre. Police officers in general carry about 20 to 30 pounds of equipment, which is valued at around $1,800. The more police forces expand, the more sales Cadre might see.

As of the end of 2020, there were 795,000 police officers and detectives employed in the US. The Bureau of Labor Statistics is projecting a 7% increase by 2030. Those new offices will need gear and equipment and Cadre is ready to supply it.

Cadre already counts 23,000 police departments, federal agencies, and public safety offices as customers. As a leader in a small market, Cadre has a lot of pricing power which can help the bottom line.

Stock is Cheapish

It doesn’t hurt that Cadre’s business is non-cyclical, has high-profit margins and the majority of its products have four-to-ten-year replacement cycles. Its stock also pays a dividend yield of 1.6%.

Despite the macrotrends that might give Cadre a boost, shares are cheap on a relative basis. The stock is trading under ten times next year’s EBITDA. MSA Safety (MSA), a larger and more diversified rival, trades at 14 times next year’s earnings.

Defunding the police is out and funding law enforcement is in again. With police forces across the nation arming up, Cadre may turn out to be an interesting play.

Are you bullish or bearish on Cadre?

Starbucks' Secret Sauce: Schultzy

Second Time is a Charm

Starbucks (SBUX) may be down but it's not out, and investors have CEO Howard Schultz to thank. Sure it's his second time at the helm of the nation’s largest coffee chain, but the last time he ran the company for a decade, shares posted an annualized return of 18.2%.

With Shultz running the show again investors have a reason to be hopeful. That’s even in the face of record-high inflation that’s adding to Starbucks’ bottom line, a slowdown in China, a movement to unionize among its employees, and slowing growth for its loyalty program.

Costs Aren’t Getting Worse

The last time Schultz returned to Starbucks he successfully steered the company through the Great Recession largely by slashing expenses. Analytical bookkeeping and hard decision-making skills may be required this time around as well given sales costs are projected to increase 30% in 2022.

Starbucks warned in May it expects to face $200 million in additional expenses driven by wages, employee training, and technology rollouts. For 2023, Wall Street expects Starbucks to have $500 million in additional costs.

Analysts don’t expect Starbucks to bring costs down anytime soon but they do think the worst is over in terms of rising expenses. If expenses do increase due to growth investments, Wall Street and investors should be forgiving.

Improving Business Conditions for the Assist

Schultz may also get an assist from improving business conditions in China. Same-store sales fell 23% in the second quarter compared to last year, but new pandemic restrictions in the country are easing, which should drive more business Starbucks’ way. Some Wall Street watchers think sales in China could hit pre-pandemic levels in the first half of next year.

EPS at Starbucks is forecast to fall 11% in 2022 but increase about 20% in 2023. Barring any unforeseen increase in fixed costs, EPS could rise another 15% in 2025. If Starbucks hits those numbers, its stock may rebound.

The pandemic, inflation, and a slowdown in China have turned Wall Street and investors against Starbucks lately. With Schultz at the helm again it might just get the jolt it needs.

Are you bullish or bearish on Starbucks?

Street Treats: Kenny Flowers July 4th Sale - Up to 40% off Select Styles

🌺 Introducing the Tortola Collection. Named after the gateway to the British Virgin Islands, this tropical print is timeless and immediately takes you somewhere sandy with eternal turquoise waters. Throw on a selection from the Tortola Collection and its frozen cocktails, sailboats, and islands in the distance. Grab your personal gateway to paradise at this link.

👕 Picture blue skies and green, wide open fairways. This golf polo is clean, classic, and country club approved. You’re an official member of the Kenny Flowers Country Club when you pick this one up. Buttery soft, moisture-wicking, and wrinkle resistant. Starting today at 10:30 AM Eastern, shop this polo and 90+ other products from Kenny Flowers for up to 40% off during their July 4th Sale.

👙 Head on down to South Florida and get yourself a straw fedora. This collection, featuring pink and white stripes, is inspired by Boca Raton. It oozes seaside sophistication with eye-catching luxe swimwear that’s lavish and timeless. Pair it with a chilled glass of rosé and an afternoon tan. The Boca is swimming its last lap this summer so snag yours before it’s gone.

CarMax Might Have Some Miles Left

The Ride Isn’t Over Just Yet

Rising interest rates and soaring inflation haven’t decimated the used car market just yet. That means CarMax (KMX) still has some mileage left in its share price. Now, this doesn’t mean business will return to the heady days of the pandemic when new and used dealers couldn’t keep vehicles in stock. But it does suggest the company still has some room to run.

Last month, for example, CarMax posted a 21% year-over-year increase in revenue for the fiscal first quarter. Wall Street was looking for sales growth of 18%. The upside beat, driven by rising average selling prices, sent shares of CarMax surging.

Keep in mind that used car sales were down 11% in the quarter but customers paid about 28% more per vehicle compared to last year.

Older Cars in Demand

The fiscal first quarter marked the second one in a row during which unit sales were lower year-over-year, as inflation and rising interest rates start to take a toll on consumer spending. CarMax’s sales mix is leaning more toward older cars which tend to be cheaper than newer models. Cars that are six-plus years old typically make up about one-fifth of CarMax’s overall sales. In the quarter ending in May, this figure was 35%.

Inventory is also beginning to return to pre-pandemic levels and consumer desire to spend is waning. The University of Michigan’s June survey of consumer sentiment was at an all-time low.

Rising Rates Take a Toll

Then there is CarMax’s lending business that could run into trouble in the coming months. As interest rates increase so could CarMax’s funding costs. Wedbush analyst Seth Basham said the difference between CarMax loan rates for customers and its own funding costs is at the lowest spread since 2008. That may get worse if the Fed lifts rates more times this year.

The used vehicle market had a long ride during the pandemic and while it hasn’t driven off the cliff yet, there are signs the industry is slowing. As the leader of the used car market in the US, CarMax may run out of gas. For now, however, there might be a little left in the tank.

Are you bullish or bearish on CarMax?

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