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WEEK AHEAD
August 21-25, 2023
S&P averages faced downward pressure for yet another week amidst ongoing momentum downtrends. Nevertheless, the positive trajectory of bond yields, particularly the tightening seen in 2-year Treasuries and beyond, is a promising fundamental indicator for the economy. This trend in bond yields also indicates a gradual normalization away from an inverted yield curve. Sowell’s tactical models watchfully remain in full position (100%).
While year-over-year pending home sales have experienced a 13% decline, it's intriguing that median home sales prices have risen by 3% during the same period. This trend becomes even more remarkable when considering that the national average for 30-year fixed mortgage interest rates currently surpasses 7.50%. This contrasting landscape in the housing market highlights an economy that consistently defies expectations, surprising economic experts.
The driving force behind this surprising phenomenon is the persistent demand for housing, which continues to outpace the available supply. Redfin reports that the inventory is a mere 2.7 months, indicating a substantial scarcity. Meanwhile, broader economic indicators also reveal underlying strength. U.S. Industrial Production and Manufacturing Production have outperformed consensus estimates, showcasing growth rates of 1% and 0.5% growth rates, respectively. These figures underscore the economy's robustness, although they might fall short of fully supporting the major market averages. Last week, the S&P 500 and Bloomberg US Agg Bond indices dipped again from the YTD highs by -2.05% and -0.50%. What was also weighing on the market was fear of China's lower-than-expected growth rate and weak domestic demand's potential spillover to the U.S. by China's central bank's sudden one-year policy rate cut of 15 bps.
With earnings reports from over 90% of the S&P 500 companies already on the books, the focus in the upcoming week will shift to the forward guidance provided by key players such as Dollar Tree, Intuit, Lowe's, NVIDIA, Tolls, Ulta Beauty, and Workday. However, what might hold even greater significance is the attention on Fed Chair Powell's remarks at the Jackson Hole Symposium. These collective insights can potentially dissipate the lingering cloudy geopolitical sentiment and propel the markets forward.
"So, one key is to avoid making macro calls too often. I wouldn't want to try to make a living predicting the outcome of coin tosses or figuring out whether the favorite will cover the point spread in every football game over the course of the season. You have to pick your spots – as Warren Buffett puts it, wait for the fat pitch. Most of the time, you have nothing to lose by abstaining from trying to adroitly get in and out of the markets: you merely participate in their long-term trends, and those have been very favorable."
– Howard Marks, Co-Chairman of Oaktree Capital Management, Taking the Temperature, July 10, 2023.
Bloomin' Brands May Be Finally Blooming
It's clear both during and after Covid that the restaurant landscape has changed. The dynamics of the restaurant business have gone through the very evident destruction of the mom-and-pop local independent food restaurants to the quite stunning transition to delivery business spurred by Uber and Doordash.
The moniker ghost kitchen belies the progressive and lucrative growth of digital-only restaurants. If you think Uber and outsourcing only affected global transportation, think again.
Covid will go down for years as an incredibly disruptive event that has created unforeseen changes in almost every aspect of life. But back to Bloomin' Brands and what was an announcement that reaffirms a pre-covid trend of mergers and acquisitions in the restaurant space. The WSJ reported that investment advisor and activist, Starboard Value, had taken a more than 9.9% position in the company. Starboard's history as a hedge fund taking positions in consumer brands like Darden Restaurants, Papa John's, and Smithfield Foods, to name a few.
Back to Bloomin' Brands, Florida based and founded in 1988, owns and operates over 1400 restaurants globally. The brands include Outback Steakhouse, Carrabba's Italian Grill, Bonefish Grill, and Fleming's Steakhouse. I can say that I have eaten all of them. There seems to be no doubt that Starboard will push Bloomin' management to create shareholder value.
Restaurant sales have rebounded since Covid and have surpassed pre-covid levels. It seems counterintuitive, but the combination of increased travel and the digital enhancements expanding the demand of conventional brick & mortar businesses have been a boost to sales. Recent trends have restauranteurs focusing on employee retention, enhancing the service experience, and improving brand value. It may be paying off as Bloomin Brands has seen its Q1 Revenues increase by 9.1% from 2022 to $1.2 billion. U.S. comparable sales increased by 5.1% despite a slight decrease in traffic.Margins also increased from 9.4% to 9.7% a year before. Recently, Q2 Bloomin beat earnings expectations as EPS was $.68. The current dividend is $0.86 a share and a forward p/e of 9x.
If history is a guide, Starboard's track record has been good in driving value.
Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.