🥓The Next Battleground

Plus, Uber or Lyft? Wall Street weighs in.


Happy Sunday to everyone on The Street. 

OPEC+ announced it will cut oil production by 2 million barrels per day, starting next month. While gasoline prices are down significantly from their June peak, they had been edging up recently, and this could cause them to spike further.

On Friday, we outlined what pundits across the political spectrum think about this move by OPEC+ in our daily newsletter, The Flag. This is always such an eye-opening exercise because it highlights how absurd our national media is. They just despise each other so much and they’re so predictable. Anyway, if part of your investment research comes from being well-informed from multiple viewpoints, we highly recommend signing up. All you have to do is click this link.

Plus, here are the results from our polls last week:

  • Are you bullish or bearish on Generac? 90% of you said Bullish, 10% said Bearish.
  • Are you bullish or bearish on APA? 75% of you said Bullish, 25% said Bearish.

And a bonus tweet from Genevieve Roch-Decter: “What happens if Jim Cramer recommends the Inverse Jim Cramer ETF?”


Review

US stocks fell Friday as investors studied the September jobs report and attempted to predict how the Fed will respond. Concerns related to interest rates continue to be widespread on Wall Street, as the central bank remains committed to fighting persistent inflation by enacting hikes. In this regard, the market is reacting negatively to what would otherwise be perceived as good economic news.

According to the Bureau of Labor Statistics, the economy added 263,000 jobs last month, which did come in slightly below estimates. But the unemployment rate ticked down to 3.5% from 3.7% in August. That’s a positive sign for workers, but investors worry about what it will mean for the Fed. Because the labor market remains robust despite tightening monetary policy, the central bank is likely to be undeterred in pursuing additional rate hikes. That weighs on equities and sends government bond yields higher.

On the same front, New York Fed President John Williams delivered comments at the close of the week and said rates need to rise to 4.5% over time. He added the pace of hikes and how high the target rate ultimately goes will be dependent on economic performance.

In company-specific news, Advanced Micro Devices saw its share price slip after issuing downbeat revenue guidance for its third quarter. Retailer Levi Strauss also cut its outlook.

Overseas, beleaguered investment bank Credit Suisse offered to buy back $3 billion worth of its shares and confirmed it is selling its famous Savoy Hotel, located in Zurich’s financial district. This comes as the market continues to express concerns over Credit Suisse’s future. The company’s share price has plummeted in recent weeks amid increased bets against its debt.

In the ongoing Twitter saga, a judge ruled that Elon Musk must complete his purchase of the social media platform by October 28 in order to avoid a trial. In a court filing, Musk said he wants Twitter to drop its lawsuit and close on his purchase of the company at $54.20 per share.

For the week as a whole, the Dow Jones Industrial Average rose 1.99%. The S&P 500 gained 1.51%, and the Nasdaq Composite added 0.73%.


Preview

There are no major economic data points scheduled for tomorrow.

Tuesday, the NFIB Small-Business Index is due for September. The monthly gauge helps track the sentiment of small business owners across the country. Sentiment actually improved in August as inflation concerns cooled somewhat. With that said, price increases and labor shortages are still weighing on the minds of many small business owners.

Federal Open Market Committee or FOMC minutes are due Wednesday afternoon. Wall Street will be parsing through minutes from the central bank's latest policy meeting to see if they can extract any additional information about the Fed's rate hike campaign. Specifically, analysts want to get a sense of how long it will last and how far the Federal Reserve is willing to go to squash stubbornly high inflation.

Speaking of inflation, the Consumer Price Index for September is due Thursday. Along with Core CPI, economists will get a sense of where inflation stands heading into the final quarter of the year. Initial jobless claims and continuing jobless claims are also released today.

Finally, on Friday, September retail sales are due. Since consumption is such a major factor in overall GDP, this is a figure that many investors watch very carefully. September sits right between the back-to-school shopping period and fall holiday months so it will be interesting to see how retail sales held up after summer's end. University of Michigan's 5-year inflation expectations report for October is also due along with August Business inventories.

On the earnings front, Friday is when the third-quarter season really kicks into high gear with a handful of reports from big banks. This includes JPMorgan Chase & Co (JPM), Wells Fargo & Co (WFC), Morgan Stanley (MS), and Citigroup (C). Slightly smaller players including PNC Financial Services Group (PNC), US Bancorp (USB), and First Republic Bank (FRC) are also scheduled to report. In terms of the sector at large, investors will be curious to hear how rising rates are impacting their bottom lines. Traditionally, when rates rise, this increases what's called the Net Interest Margin for banks, or how much they can make from the spread between rates on the savings and lending products. These banks all have different divisions so it's just one piece of the overall puzzle.


Learn Financial Strategies from the Ultra-Wealthy

There’s something most investors don’t know. The ultra-wealthy – including billionaires, family offices, and institutions – allocate large portions of their investment portfolios outside of the stock market. This includes assets such as real estate, hedge funds, and private equity.

The average high-net-worth investor tends to focus exclusively on stocks and bonds. Listen to The Billionaire Podcast and dive into the world of alternative investments while uncovering strategies utilized by the ultra-wealthy. You’ll hear discussions on economics, plus interviews with successful investors as well as alternative investment experts.

Subscribe here and sign up for Invest Like a Billionaire


Lyft's Losing Its Luster

Lack of Diversification Weighs on Shares

It turns out bigger is better at least in the case of ride-sharing. Lyft (LYFT), the scrappier number two player behind Uber (UBER) seemed to be firing on all cylinders with its sole focus on serving up rides in North America.

Then the pandemic struck and Uber’s ancillary services like Uber Eats blew up in the US and abroad. Uber emerged as the pandemic winner, leading in both the number of rides and drivers on its platform.

Investors have taken notice. Last year Lyft was worth $22 billion. Today its market cap is roughly $4.4 billion. In comparison, Uber is valued at nearly $53 billion.

Lyft Needs New Growth Drivers 

Staying focused on ride-sharing alone was supposed to give Lyft an edge. Lyft billed itself as “driver-centric” hoping it would lure drivers to its platform. This work worked to a point, but it didn’t make them loyal. Ride-hailing drivers typically have both apps on their phones but prefer to use Uber. Dissatisfaction among drivers is also higher with Lyft.

Additionally, from a birds-eye view, the market isn’t taking off as expected. Of the people who can afford to hail a ride, only 65% are using it semi-regularly. Hybrid work arrangements are also weighing on overall demand. Without a delivery service or additional revenue stream, Lyft is at a disadvantage. For context, Uber also lets users book trains and taxis on its app and is delivering groceries and booze.

Staying in its Lane… For Now 

Uber has been able to boost its sales and grow its user base faster because of general diversification with Lyft. In 2022, Wall Street expects Uber’s revenue to grow 80%. Analysts are targeting 27% growth for Lyft. EBITDA growth is also expected to be a little weaker at Lyft for the next two years.

Even with slower growth prospects, Lyft is staying in its lane. It’s betting its lack of so-called distractions will help it grow and prosper. Maybe the focus makes sense, but for the time being Wall Street appears more likely to hitch a ride with Uber.


No More Bad Hair Days?

Headwinds

Bad hair days can be a thing of the past. That’s according to Olaplex (OLPX), the hair care company that has a cult-like following among millennials and Gen-Zers. Sales are booming with growth of at least 20% expected next year.

You wouldn’t know that by looking at its stock, however. Shares are down over 50% since its public debut in September 2021. That’s not good, but some of this can be explained.

First, it hasn’t been a great year for stocks in general and markets have been overwhelmingly unkind to untested new offerings, especially if they are growth names. Secondly, Advent International, the PE shop that brought Olaplex to market still holds a 76% stake in the company. If Advent dumps shares, this will likely put additional downward pressure on the stock.

Despite these headwinds, there’s a lot to like about the company if investors prefer to focus on what Olaplex does best: making products that give consumers shiny hair.

Luscious Margins

Take Olaplex’s profit margins for starters. Last year the company’s EBITDA came in at 68.3%. This year the figure will likely fall to 63.6%, largely because of its expansion into stores, which generally means lower margins. For context, Olaplex’s products are mostly sold through salons, which tend to have higher margins.

Even at 63%, Olaplex’s projected EBITDA is better than rivals including L'Oréal which has its own line of high-end hair care products. L'Oréal’s profit margins in 2022 are expected to be just 24%.

Despite soaring inflation, Olaplex has been able to keep costs down and prices up. It also doesn’t have fixed overhead costs like offices since it’s employee base has always worked remotely.

International Expansion

There’s also international expansion, which could be a boon to the stock. Barclays expects overseas sales to account for 75% of its growth in 2023. The hair care company operates in the UK, Europe, China, and other parts of Southeast Asia.

Let’s not forget there’s legitimate science behind Olaplex’s hair care line which may be getting lost on investors. Bis-amino, the patented hair-building ingredient found in its products, claims to improve the structure and quality of hair, particularly if it's dry and over-processed.

Consumers swear by it, but at the moment investors aren’t buying into the hype. Find a millennial or GenZer in your family or friend circle and see if they’ve heard of the product or use it themselves. Gauge their reaction and then judge for yourself if it’s worth brushing it into your portfolio.


Learn Financial Strategies from the Ultra-Wealthy

There’s something most investors don’t know. The ultra-wealthy – including billionaires, family offices, and institutions – allocate large portions of their investment portfolios outside of the stock market. This includes assets such as real estate, hedge funds, and private equity.

The average high-net-worth investor tends to focus exclusively on stocks and bonds. Listen to The Billionaire Podcast and dive into the world of alternative investments while uncovering strategies utilized by the ultra-wealthy. You’ll hear discussions on economics, plus interviews with successful investors as well as alternative investment experts.

Subscribe here and sign up for Invest Like a Billionaire


Breakfast is the Next Battleground

Move Aside Big Mac’s, It’s Egg McMuffin’s Turn 

Forget Big Macs and Frostys, when it comes to the next growth driver for the nation’s favorite fast food companies think egg sandwiches and piping hot coffee. McDonald’s (MCD), Wendy’s (WEN), and Burger King (QSR) are among the chains doubling down on serving breakfast on the go.

It makes sense since they already have a lock on lunch and dinner. The first meal of the day is the only area that is trailing behind. It also comes at a time when inflation is still stubbornly high. Even with people slowly returning to work, they are brown bagging it to save money. That means fewer dollars going toward Whoppers and french fries at lunchtime.

Breakfast Is a Big Business 

Prior to the pandemic breakfast was the fastest-growing category for the food joints. That took a back seat during lockdowns, but is picking up again as people return to work.

There’s a lot of opportunity for the fast food chains to grow sales by serving up eggs and bacon. Breakfast accounts for only about one-quarter of McDonald’s overall sales, 15% of Burger King’s, and 20% of Jack and the Box. Wendy's, a late comer to the breakfast party, hoped to derive 10% of its sales from breakfast in 2022, but it’s only around 7% for now.

Competition Comes Calling 

Wendy’s has had fits and starts over the years breaking into the breakfast market. It doubled down on the initiative right before the pandemic struck and is still all in. The chain is targeting $3,000 per week, per store in breakfast sales. Currently Big Red breaks even at around $2,000 per week. The majority of breakfast sales come via drive-thru orders which have higher margins.

Breakfast is the next battleground for the nation’s fast food chains with everyone vying to be the winner. How it plays out is up in the air but one thing is for sure: the first meal of the day is getting cheaper and more expansive for on-the-go consumers.


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