We recently published a list of The 10 Worst Affordable Stocks to Buy Right NowIn this article, we will analyze how Brinker International, Inc. (NYSE:EAT) stacks up against other stocks that are currently underperforming.
How does the market react to rate cuts?
In one of our recent articles on the 10 Penny Stocks on the RiseWe discuss how overall macroeconomic conditions have played a crucial role in creating an environment conducive to the next Federal Reserve rate cut. Below is an excerpt from the article:
“The U.S. economy has stabilized, recession risks have receded, and inflation continues to cool. On August 30, Reuters reported that the Federal Reserve received further confirmation that inflation is continuing to decline. The personal consumption expenditures price index rose 2.5% year-on-year in July, and inflation has remained within the Fed’s 2% target. The Fed chairman has indicated that “the time has come to cut rates.”
In addition, another Reuters report published on the same day reported that the US dollar appreciated as another key inflation indicator came in line with forecasts. The Fed is expected to cut rates by 25 basis points this month. Looking ahead, markets have forecast 100 basis point cuts by the end of 2024.
The stock market is already riding the wave of expected interest rate cuts. On August 20, CNBC reported that the stock market was climbing once again, putting the S&P 500 and NASDAQ on track for their eighth consecutive positive session, marking their longest winning streak this year.
While there has been debate about a 25-point or 50-point cut, the market has been fluctuating leading up to the announcement. On Sept. 17, CNBC reported that the S&P 500 was down after hitting an all-time high on Tuesday. The market hit a new all-time high of 5,670.81 and was down 0.1% at 5,627. The Nasdaq was up 0.1%, while the Dow Jones dropped 40 points.
Traders have weathered summer headwinds and put concerns about the health of the U.S. economy behind them, thanks to expectations that the Federal Reserve will cut interest rates. Elsewhere, Wall Street has been on the lookout as analysts expect rate cuts to help boost corporate earnings growth.
Tom Lee, co-founder of Fundstrat Global Advisors, joined CNBC to discuss how the market is expected to perform leading up to the Fed rate cuts and after the announcement. Lee believes that one of the factors causing confusion among investors is the election period. The market is expected to remain in a fluctuating environment for the next eight weeks until the election is over. However, the Fed rate cuts come at a crucial time to bring something positive to the market.
There are two main reasons that lead to rate cuts: one is the decline in inflation and the other is the slowdown in the labor market, which needs the help of the Federal Reserve. Moreover, Lee believes that regardless of whether the Fed decides on a 25-point or 50-point cut, the result will be positive for the market. He believes that investors should be confident for the next 12 months as whenever the Fed cuts rates, the success rate for the markets has been almost 100%. Moreover, markets recover after elections regardless of who takes the seat.
Our methodology
To compile the list of the 10 worst affordable stocks to buy right now, we used Finviz’s stock screener. We set our filters to get affordable stocks with high short interest, i.e. stocks that are trading below the market’s average forward P/E of 23.79, that expect positive earnings growth this year, and that have high short interest. From the list of affordable stocks, we selected 20 stocks that were held by institutional investors. Once we had the list aggregated, we ranked them based on their percentage of outstanding shares shorted, obtained from Yahoo Finance. Note that the list is ranked in ascending order of short interest.
Why do we care what hedge funds do? The reason is simple: Our research has shown that we can beat the market by mimicking the best hedge funds' best stock picks. Our quarterly newsletter strategy selects 14 small- and large-cap stocks each quarter and has returned 275% since May 2014, outperforming its benchmark by 150 percentage points (See more details here).
A Chili's Grill & Bar restaurant filled with happy customers enjoying a meal.
Brinker International, Inc. (NYSE:EAT)
Forward price-earnings ratio: 15.06
Earnings growth this year: 14.10%
Number of hedge fund owners: 33
% of outstanding shares shorted: 16.21%
Brinker International, Inc. (NYSE:EAT) is a fast-casual restaurant company that owns, develops and operates franchises of its restaurant brands. It operates through two principal business segments, including Chili's and Maggiano's. The company owns more than 1,600 restaurants in the United States and 27 other countries.
The restaurant company is one of the worst buys right now. It's affordable because it's trading at 15 times forward earnings, a 5% discount to its industry. And it's worse because it has high short interest as a percentage of shares outstanding, which stands at 16.21%.
But that doesn't necessarily mean it's not a viable investment opportunity. Brinker International, Inc. (NYSE:EAT) is popular with hedge funds: In the second quarter, 33 hedge funds had stakes in the company. Their total holdings amounted to $663.56 million. DE Shaw is the largest shareholder with a position valued at more than $131 million.
The fact that the company is largely owned by institutional investors is not the only positive aspect of the company. It surprised investors quite a bit when its second-quarter sales beat analysts' expectations. Its revenue for the quarter was $1.21 billion, compared to expectations of $1.16 billion.
The company's comparable-store sales increased 11.9% year-over-year, with free cash flow margins of 6.9% (vs. 0.7% last year). These encouraging financials, coupled with the upgraded earnings per share (EPS) guidance for fiscal 2025, indicate continued and future profitability. Management expects earnings per share (EPS) for fiscal 2025 to be in the midpoint of $4.55.
Choice Equities Capital Management made the following comment on Brinker International, Inc. (NYSE:EAT) in its Q4 2022 Investor Letter:
“Overall, our holdings are performing as expected. As a general statement, despite potential economic headwinds, we continue to expect increasing cash flows, and in almost all cases operating margin expansion, over the next year and beyond. Restaurants: Signals suggest our restaurant margin expansion thesis continues to play out as expected as restaurants have historically been slow to back off inflation-based menu price increases with their customers by reducing prices even if incoming food costs decline. Papa John's Inc. (PZZA) and Brinker International, Inc.. (NYSE:EAT) continue to perform well.
“We continue to find attractive new investments, particularly within the broader theme of normalization. Similar to our margin expansion thesis in restaurants, we are finding ample opportunities in other industries where companies appear poised for margin expansion thanks to cost relief from price normalization on items such as transportation, cotton or merchandising margins.”
General food consumption ranks first on our list of the worst affordable stocks to buy right now. While we recognize EAT's potential as an investment, our conviction lies in the belief that some AI stocks hold more promise for generating higher returns and doing so in a shorter time frame. If you're looking for an AI stock that holds more promise than EAT but is trading at less than 5 times its earnings, check out our report on the stock. The cheapest AI stocks.
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Disclosure: None. This article was originally published on Insider Monkey.
