Buy these stocks to bet on the resilient U.S. consumer, Jefferies says
According to Jefferies, casual dining is a great option for investors looking for the best deals in a downmarket market. Shares of casual dining stocks are seeing a decline due to high inflation and concerns about a possible recession. According to the firm, the decline may have ended as consumers are more resilient than expected. “We think Casual Dining represents the best risk/reward, with valuations already cut in half … and our scenario analysis suggests risk to EBITDA less than feared,” wrote analyst Andy Barish in a note to clients. “Importantly, the consumer is proving more resilient & capacity backdrop dramatically more favorable, supporting more staple-like outcome in downturn, and opportunity for ongoing recovery in share gains.” According to Jefferies, fast-casual restaurants stocks and quick service restaurants have fallen 22% and 38% from 2021 peak levels, respectively. Companies have been dealing with rising food and labor costs, which has impacted margins. However, many chains have responded by raising prices for customers. Jefferies claims that the negative impact on sales and margins will not be as severe as during the Great Recession. Consumer spending is still strong, according to some, such as Brian Moynihan, CEO of Bank of America. What’s stopping them from growing? “Nothing right now,” Moynihan said to Bloomberg Television in a Davos, Switzerland appearance this week. Moynihan stated that the consumer was “in good health” and customers of the bank have spent 10% more this month than they did last year. A bet on restaurants Among its top picks to play the casual dining market, Jefferies named restaurant and entertainment chain Dave & Buster’s . According to the firm, this stock is one of those consumer discretionary names that can benefit from a long slowdown. Barish stated that the company was “well placed to capitalize upon latent consumer demand and is best insulated among company-owned models from inflationary headswinds given amusements/games industry.” In an April note, Barish said. The shares of Dave and Buster’s stock have fallen approximately 13% over the past year. But, according to Jefferies’ $60 12 month price target, shares could double by Tuesday’s closing price. Jefferies cut also included Cheesecake Factory, which has seen its shares fall more than 20 percent this year. Jefferies projects 88% upside in a base case scenario that suggests a recovery by 2025. Based on Tuesday’s closing price of $50, the stock could rise nearly 79% in near-term. Jefferies also includes Bloomin’ Brands, Outback Steakhouse’s owner, and First Watch Restaurant Group. These stocks are currently down by about 9%, and over 12%, respectively.