Consumers are becoming more discerning about how they spend their money. That could prove to be more important to the financial-market’s trajectory than the value and momentum stock debate that has recently captivated pundits, the strange happenings in the repurchase-agreement market, and all of the other high-minded chatter that surrounds investing.
Despite a surge in second-quarter household spending that suggested that consumers are spending with confidence, signs from Corporate America suggest otherwise. This week, Corning (GLW) warned of slower sales, indicating that people are less interested in buying high-end televisions and smartphones. And FedEx (FDX), a bellwether of the e-commerce economy, reported bad earnings and a dour outlook.
Both stocks declined, reinforcing a weak report from the Institute for Supply Management. Though some government reports have been better, institutional investors usually view corporate data as more authentic.
“This earnings season is going to be dangerous. When investor expectations are too high, it kills gaming the numbers,” said Vincent Au, a portfolio manager at hedge fund firm Gondor Capital Management.
For proof, consider the wounded We Co., a manager of shared office spaces prevalent among the gig economy and start-up ventures. The stock offering was delayed, even though the valuation of We Work’s parent was repeatedly lowered.
Banks use initial public offerings to reward their best customers. The lack of interest in the IPO among the Street’s most-sophisticated investors—who typically sell shares at great profit to retail investors who chase after rising prices—is yet another troubled sentiment indicator.
That those signs exist even as central banks are expected to keep lowering interest rates, which encourages people to increase investment risk and spend money, suggests that blind faith in a better tomorrow is ebbing among the cognoscenti.
Meanwhile, business is booming in places so far away from Wall Street that they might as well be on another planet.
Cracker Barrel Old Country Store (CBRL) reported good earnings and a big jump in the sale of inexpensive comfort foods. Other fast-food stocks, including Chipotle Mexican Grill (CMG), McDonald’s (MCD), Yum! Brands (YUM), Wendy’s (WEN), and Restaurant Brands International (QSR), are also performing well. The sector is a safety play that pays good dividends backed by reliable businesses.
A Restaurant Brands subsidiary has even sparked a national mania—Popeyes’ new chicken sandwich—that rivals the usual excitement about Apple products. Alas, it’s hard to find one. They’re sold out.
It is more suave to recommend stocks before they have surged, but if you agree that economic and investor sentiment is showing signs of shifting, then restaurant stocks should still perform well. The stocks have momentum and offer some safety if economic conditions sour.
To position, investors can sell put options that expire in December or January with strike prices that are, say, 5% below the current stock price. Pair the put sale with a long call option just above the stock price to create risk reversals that cover third-quarter earnings reports, while capturing any sector upside that might come if the economy weakens.
With Restaurant Brands at $72.59, for example, investors can sell the January $70 put for $2.80 and buy the January $75 call for $3.20. For 40 cents, investors get to buy the stock at $70 and profit from gains above $75.40. At $80, the call is worth $5. During the past 52 weeks, shares have ranged from $50.20 to $79.46.
“Cheap food may now trump expensive toys,” said Michael Schwartz, Oppenheimer’s chief options strategist.
Investors who agree will probably supersize their positions in the fast-food sector to wager that the stocks will rise higher if the economy weakens. That will benefit anyone who comes to the party, even those who arrive fashionably late.
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