Category: INO.com Contributors

Own Cannabis Stocks For Less Than $20

Posted on by Ian Cooper

The broad market is still wobbly, with inflation showing no signs of cooling.

Not helping, consumer prices soared 9.1% in June, year over year – its fastest pace since 1981, and well above expectations for 8.8%.

According to CNBC, “Excluding volatile food and energy prices, so-called core CPI increased 5.9%, compared to the 5.7% estimate. On a monthly basis, headline CPI rose 1.3% and core CPI was up 0.7%, compared to respective estimates of 1.1% and 0.5%.”

“The breadth of the price gains shows how rising costs have seeped into nearly every corner of the economy. Grocery prices have jumped 12.2% compared with a year ago, the steepest such climb since 1979. Rents have risen 5.8%, the most since 1986. New car prices have increased 11.4% from a year earlier. And average airline fares, one of the few items to post a price decline in June, are nevertheless up 34% from a year earlier,” added the Associated Press.

Hopefully, inflation is starting to peak, but it’s a tough call at this point.

The latest numbers could force the Federal Reserve to hike rates another 75 basis points, which then runs the risk of the central bank overshooting, potentially pushing the U.S. economy closer to a recession.

Thankfully, there are some bright spots in the market.

The cannabis sector happens to be one of them.

In fact, the sector, as measured by the Advisor Shares Pure US Cannabis ETF moved slightly higher from a low of $10.08 to a recent high of $10.87 over the last week.

That’s happening for a few reasons. Continue reading "Own Cannabis Stocks For Less Than $20" →

Are We Returning To Normal?

Posted on by George Yacik

It may be time to start thinking that this recent bout of high inflation won’t really last as long as we thought.

Right now the outlook is starting to look fairly positive: Oil prices are coming down, the chip crisis seems to be over — the shortage has quickly turned into a glut — supply chain problems have eased.

At the same time, technology will continue to make things more efficient, just as it did before the Covid-19 lockdown, thus easing price pressures.

Retailers are overloaded with inventory and are already unloading it at steep discounts. And stores can only raise prices so much before consumers say no. Do I really need that $6 box of cereal? Probably not.

Does this mean the Federal Reserve won't need to be as aggressive in raising rates as we thought? Was the Fed - dare I say it — correct after all in believing that inflation was transitory, and the only thing they got wrong was how long that temporary period would be and how high inflation would rise?

Maybe it won't be as long as most everyone thinks. Like most things lately in the U.S. — climate, Covid, the economy — crises never turn out to be as bad as the panic-mongers would have us believe.

Indeed, consumers don’t appear as worried about inflation as most people think. Consumer confidence numbers have dropped sharply, it’s true, but retail sales have held up, witness the 1.0% rebound in June after falling 0.1% the prior month, according to last Friday’s report.

That’s mainly because we still have a robust job market and incomes continue to rise, maybe not at the same rate as inflation but not far behind. The economy added 372,000 jobs in June, down slightly from May’s gain of 384,000 but 100,000+ more than forecasts.

The unemployment rate remained near the 50-year low of 3.6% and about where it was before the pandemic. Most importantly, perhaps, average hourly earnings rose 5.1% in June from a year earlier, not far below the core inflation rate of 5.9%.

Does this mean we’re out of the inflationary woods that our monetary and fiscal authorities have largely created by flooding the economy with money when it wasn’t totally necessary? I wouldn’t go that far.

While income gains seem to be running only a little behind the rate of inflation, the same can’t be said for interest rates. On Friday the yield on the U.S. Treasury’s benchmark 10-year note had fallen below 3.0%. Can the Fed realistically get inflation down to its target rate of 2% if inflation is double that on long-term bond yields? It doesn’t seem possible.

However, it’s useful to note that other bellwether rates have risen closer to the rate of inflation, thanks to the threat/promise of more Fed rate hikes. Specifically, the average rate on a 30-year fixed-rate mortgage in June hit 5.52%, according to Freddie Mac, more than 200 basis points above where it stood at the beginning of the year.

That’s certainly not good news if you’re planning to finance the purchase of a house soon, but it does stand the possibility of removing some of the froth from the housing market — both purchases and rentals — that is keeping many young people from starting out on their own. Long term, that’s a good thing.

More than any other statistic, perhaps, housing costs were an area where the Fed proved woefully inept in measuring inflation over the past decade or so.

Ever since the global financial crisis of 2008, the Fed banged its collective head against the wall trying to raise the inflation rate to 2%, while all along inflation was running well above that, if only the Fed’s army of Ivy League-trained economists had paid attention to what was going on around them in home prices and rents.

So where does that leave us? Is the Fed going to stop tightening because inflation may appear to be under control? No, nor should it.

For the past 15 years or so, ever since the end of the global financial crisis in 2008, we’ve heard constant pleas (including from yours truly) that monetary policy needs to “normalize,” meaning to some traditional, pre-2008 level of interest rates. Alas, it never came to pass.

The post-crisis economic growth rate was never strong enough to persuade the Fed to ease monetary policy and raise interest rates significantly. Then we had the pandemic, which moved everything back to square one, with Fed policy going well beyond where it had ever gone before.

Now, with the economy still growing fairly strongly despite multiple obstacles — supply chain disruptions, war in Ukraine, inflation — that should give the Fed comfort to continue to raise rates and reduce its balance sheet without overly disrupting consumers, who continue to travel, eat at restaurants, and go to ballgames.

Let’s hope it doesn’t lose its nerve as it has multiple times before. That should be a boon to stocks, which could certainly use a lift.

It’s time to get back to normal.

George Yacik
INO.com Contributor

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

New Overnight Exposure ETFs

Posted on by Matt Thalman

It's no secret that big moves happen during "extended" trading hours. These extended hours are those that come before and after the markets' standard hours.

During these hours, 4:00am until the market opens at 9:30am Eastern and after then again when regular trading ends at 4:00pm until 8:00pm Eastern, company earnings are reported, merger and acquisition news is posted, and a slew of other big newsworthy events trickle out to investors. Newer retail traders may not know about these ‘extended’ trading hours, but those who follow the markets closely understand the importance of this time.

These extra hours of trading are so important because, during the morning session, it more or less sets the tone for the overall trading day.

In the pre-market hours, we received a few earnings reports that make stocks move in one direction or another. But more importantly during the morning session, investors receive a lot of the economic data that will dictate what is occurring in the economy and thus cause the market to move one way or the other.

During the after-hours trading period, from 4:00pm until 8:00pm Eastern, investors are hit with more company-specific news, such as the bulk of earnings reports, conference calls, company-specific ‘material’ or special information, and mergers and acquisitions.

These more company-specific news events cause individual stocks to make massive moves either higher or lower, but typically won't effect the overall markets the same as the economic data and reports that are released pre-market.

And then, of course, we also have the none stock market or economic data news, such as bombings, terrorist attacks, weather events, etc. These news stories are unpredictable but can push and pull the prices of individual stocks or the broader market. Even those that occur during non-regular trading hours, and perhaps don’t directly relate to businesses that trade on the market could still have an overall effect on the price of stocks (both positively or negatively).

How can we take advantage of these pre and postmarket moves?. The fund managers of two new exchange-traded funds (ETFs), the NightShares 500 ETF (NSPY) and the NightShares 2000 ETF (NIWM) believe they have a strategy to leverage these times of volatility. The back-tested theory behind these ETFs has found that by owning stocks during the non-regular trading period and then selling them during regular trading times, you would have performed better than the overall market.

Just this year, for example, the S&P 500 is down 18%, but during the non-regular trading hours, it's only down 10%. The Russell 2000 has a similar story, down 21% during regular trading hours and only 7% if you where just invested overnight according to AlphaTrAI.

The NSPY is a fund that will track the S&P 500 while the NIWM will track the Russell 2000. Both funds are intended to be held for just one day at a time, since they will be using futures, options, and derivatives to gain exposure to the markets. Furthermore, each fund will offer investors 1X exposure to their corresponding index during regular trading hours and 1.5X exposure during the overnight period. These exposure percentages are before fees and expenses.

Due to the methods being used to gain exposure and the fees and expenses, these products are not intended to be held for long periods of time and will lose value due to contango and other factors at play. Therefore, NSPY and NIWM are not necessarily intended for long-term buy-and-hold investors, although they can be. These ETFs will primarily be used to hedge against risk or purchased daily by traders whom want broad exposure to the overnight market.

Both funds went live the last week of June 2022, so performance data is not yet known. However, we do know that each fund has an expense ratio of 0.55%, which is much higher than index-tracking ETFs, but about in line with a niche fund offering very special exposure.

There are not currently any ‘overnight short’ ETFs available to investors, likely because Alphatrai Funds, the issuer of both NSPY and NIWN, believes the overnight market is more bullish. But, if you are insistent on being short overnight, you could always short these ETFs and buy put options contracts, if and when options become available for these funds.

If you are invested long term in stocks, you already have ‘overnight’ exposure, since you are not likely buying at the open and selling at the close each and every day. However, even for long term investors, having a way to ‘hedge’ risk when the market is not open each evening, or maybe even more importantly during the weekend, is always nice and may help you sleep better, especially during times when the market is abnormally turbulent.

Matt Thalman
INO.com Contributor
Follow me on Twitter @mthalman5513

Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

Two Restaurant Stocks to Buy on Dips

Posted on by Taylor Dart

It’s been a rough year for the restaurant industry, with the index declining over 40% from its highs, and many weaker operators like Red Robin (RRGB) cut in half.

The bear market in these names has been attributed to commodity and wage inflation which has pinched margins, but also due to very difficult year-over-year comps following the surge in traffic from government stimulus and diners anxious to get back to everyday life in Q1/Q2 2021.

Unfortunately, while restaurants should have been out of the woods by Q3 2022 after lapping these insurmountable comps, they’re now contending with a new issue: traffic. This has resulted from shrinking discretionary budgets with consumers hit with rising mortgage payments, rising gas prices, and the cost of groceries continuing to skyrocket.

So, while margins held up relatively due to sales leverage in 2021 and menu price increases, it could prove more challenging to pass on costs this year.

The good news is that while much of the sector has been sold off for a good reason, a few companies are being dragged down with little justification due to the bearish sentiment.

Two companies that meet these criteria are Wingstop (WING) and Restaurant Brands International (QSR), which have found themselves more than 35% from all-time highs. Let’s take a closer look below:

Wingstop (WING)

Wingstop is a mid-cap restaurant company offering classic wings, boneless wings and tenders, and it has enjoyed considerable growth since going public.

The company has seen its store count increase from 998 stores in 2016 to an estimated 1,950 in 2022, translating to an impressive 11.8% compound annual growth rate. This is helped by the company’s phenomenal unit economics (sub-two-year payback), making it an attractive brand for multi-unit franchisees.

So far, the company’s unit growth is not slowing despite its scale, with an estimated 250 stores to be opened in 2023, representing a 13% growth rate.

Although discretionary spending budgets are declining, Wingstop is in a unique position. This is because it has a relatively low average check compared to casual dining restaurants. Besides, while we are seeing commodity inflation in most proteins (beef, seafood, pork), bone-in wing prices are seeing deflation.

So, while other restaurants might be raising prices to protect margins, even if at a slower pace, to ensure they don’t hurt demand, Wingstop could hold prices steady, allowing its value proposition to stand out among its competitors in the quick-service space.

Therefore, Wingstop looks to be an interesting defensive play in the restaurant space, and I would not be surprised to see the stock trade back above $110.00 before year-end.

GDX Chart

Source: YCharts.com, FactSet, Author’s Chart

Looking at the chart above, Wingstop is not cheap, which is why I’m not long the stock yet, given that it trades at more than 48x FY2023 earnings estimates ($1.87). However, the stock does deserve a premium multiple given its double-digit unit growth rates and ability to grow earnings at a rate well above that of its peer group.

Based on what I believe to be a conservative EBITDA multiple of 24 and FY2023 EBITDA estimates of $130 million ($4.33), I see a fair value for the stock of $103.90, pointing to an 11% upside from current levels.

However, given that I prefer to buy at a minimum 20% discount to fair value, I think the name is one to keep a close eye on, but the ideal buy zone is at $83.00 or lower on any dips.

Restaurant Brands International (QSR)

Restaurant Brands International is a large-cap restaurant company with a leading franchised position among its peers, with over 99% of its restaurants franchised.

The company is best known for its brands Popeye’s Chicken, Burger King, and Tim Hortons, but it also recently acquired Firehouse Subs, a rapidly growing, digital-focused sandwich company with over 1,200 restaurants.

This acquisition pushed the company’s total restaurant count to more than 29,000, but it is confident that it can push its total store count above 40,000 by 2027. This would translate to more than 35% growth from current levels, making it more attractive than McDonald’s (MCD), in my view, which is relatively saturated and must rely on same-store sales than global expansion.

The key differentiator for Restaurant Brands is that it could be a trade-down beneficiary. While consumers might cut back in a recession, they are less likely to cut back on things that offer value and convenience. When it comes to a morning coffee/sandwich on the way to work or lunch coffee/snacks like Tim Hortons offers or value meals from Burger King and Popeye’s, I see these as staples more than discretionary items.

In contrast, one might argue that fine dining and casual dining are highly discretionary. Therefore, I do not expect the negative traffic trends that we’re seeing in casual dining to seep into the quick-service space, and if they do, I expect them to be much less pronounced.

I also believe that QSR has a much better chance of mining customers’ data to drive additional visits, given its high proportion of digital sales. Finally, given the lower average check, I see less resistance to menu price increases in quick service vs. casual dining.

Looking at the chart below, we can see that QSR is currently trading at barely 15x FY2023 earnings estimates at a share price of $51.00, which pales in comparison to MCD at ~23x earnings and YUM at ~21x earnings.

In my view, this is completely unjustified, even if QSR’s largest brand (Burger King) is seeing a slower turnaround than planned. Even if we apply a discount and use a more conservative earnings multiple of 19.5x FY2023 earnings, I see a fair value for QSR of $66.10 per share, translating to a 30% upside from current levels.

Combined with a 2.0%+ buyback and a 4.0% dividend yield, the stock is a steal at current levels.

GDX Chart

Source: YCharts.com, FactSet, Author’s Chart

It’s easy to be bearish on the restaurant space given all the headwinds, and there are certainly many names in the casual dining space that it’s best to avoid.

However, I believe names like QSR and WING have been unfairly punished and are now trading at their most attractive valuations in years following this pullback. Therefore, I see QSR as a Buy on any dips below $50.00, and I would view any pullbacks below $83.00 on WING as buying opportunities.

Disclosure: I am long QSR

Taylor Dart
INO.com Contributor

Disclaimer: This article is the opinion of the contributor themselves. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information in this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying small-cap precious metals stocks, position sizes should be limited to 5% or less of one's portfolio.

Market Distortion: Crude Oil vs Platinum

Posted on by Aibek Burabayev

Market distortions appear from time to time in different instruments and sometimes it offers opportunities. I spotted one of a kind for you in the chart below.

Oil vs Platinum Chart

Source: TradingView

There is a quarter of a century of amazing correlation between crude oil futures (gray, scale A) and platinum futures (green, scale B) in the chart above. The rally and the simultaneous climax in 2008 with the following tremendous collapse into the same valley the same year are the bright spots of that strong sync.

These two instruments have been swapping the leading role as sometimes oil has been showing the path to the platinum and vice versa. The strong rebound in the past financial crisis in 2009, as well as the robust recovery in 2020 has been led by platinum futures.

The long-lasting depreciation period from 2011 till 2020 has several mis-correlation spots and overshoots in the oil price. In 2020, the two instruments have synced again as the platinum price appreciated strongly to levels unseen since 2014 and crude oil was catching up.

Last year something went wrong as the price of the metal could not progress higher after hitting the 6-year top of $1,348 in February 2021. In spite of this, the link remained strong for some time longer.

The oil price has paused its rally making the sharp zigzag in the area of the platinum price peak as if it was “inviting” the metal to continue hand in hand sky high, but in vain. This is when the divergence has started to grow and reached the ultimate gap this year.

What’s next? Possibilities that come to my mind would be a huge drop in oil price down to the $50 area to match with the current platinum level, the strong recovery of the metal’s price to around $1,600 to catch up with the oil price, or the third path would be a compromise, both instruments close the gap equally to meet in between around $75 for crude oil futures and $1,200 for platinum futures.

Every news feed tells us why oil is rising daily. What about the platinum depreciation? Let's check its fundamentals.

Platinum Supply and Demand

Source: Metals Focus, World Platinum Investment Council

In the first quarter of this year, the platinum market is in the oversupply of 167 thousand oz. Both parts of equilibrium are down, but demand dropped harder.

Platinum Demand

Source: Metals Focus, World Platinum Investment Council

Three of four main components of platinum demand have decreased, especially industrial and investment components. The automotive demand remains flat. Total demand declined 26% (-541 thousand oz.) year-on-year, which is huge and it doesn’t support the metal’s rally.

Let us check the price chart of platinum futures.

Platinum Futures Monthly

Source: TradingView

The price of platinum futures moves downwards in the second red leg within a large pullback to retest the broken resistance.

The retracement was already deep enough as it dropped below the 61.8% Fibonacci retracement level. The next support level is located at $730 (78.6% Fib). The touch point of retest is located even lower around $670. Though, the market price has more room for a further weakness.

The price shouldn’t fall below the invalidation level of $562 where the current growth point is located. The first upside barrier is too far now at $1,348 (2021 peak).

This April I called the oil price to skyrocket to $176. These days, it is not a bold projection anymore as “Global oil prices could reach a “stratospheric” $380 a barrel if US and European penalties prompt Russia to inflict retaliatory crude-output cuts”, JPMorgan Chase & Co. analysts warned.

The updated oil futures chart is below.

Oil Futures Chart

Source: TradingView

The oil price has advanced almost $30 since April, however the previous top of $130 was not touched. There is a retest of the blue uptrend channel support now and the situation could change anytime soon.

The bounce back in the uptrend could fuel the price to retest the all-time high of $147 at least. On the other hand, the breakdown could send the price into a deep pullback to the broken orange resistance around $50.

The latter is the price area where crude oil would close the gap to catch up with platinum according to the first chart above. It is an amazing coincidence of different charts.

How do you think the current divergence between crude oil and platinum will play out?

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High energy prices are the main driver of the current persistent inflation. Platinum is an industrial precious metal and its depreciation reflects the falling demand affected by gloomy projections of the economy and the tightening Fed. This combination could result in the stagflation (stagnation + inflation) of the economy.

Intelligent trades!

Aibek Burabayev
INO.com Contributor

Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.