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Here’s What Happens When One of America’s Hottest Industries Goes Cold

by Justin Spittler, Casey Research:

One of America’s most important industries is floundering. And that could mean the U.S. economy is headed for a recession…

If you’ve been reading the Dispatch, you’ve heard us say this many times over the past few months. That’s because evidence of a slowing economy is everywhere.

Corporate earnings have been falling since 2014. CEOs of several major U.S. companies have warned of a major slowdown. The oil market is even saying that the economy is slowing, as we explained last week.

We now have another reason to think America is headed for a recession. This one comes from the restaurant industry.

Regular readers know the restaurant industry has been a bright spot of the U.S. economy since the financial crisis. From March 2009 through the end of last year, the Dow Jones U.S. Restaurants & Bar Index rose 257%. The index, which tracks major restaurant stocks, did far better than the S&P 500, which gained 202% over the same stretch.

Regular readers know the restaurant industry has been a bright spot of the U.S. economy since the financial crisis. From March 2009 through the end of last year, the Dow Jones U.S. Restaurants & Bar Index rose 257%. The index, which tracks major restaurant stocks, did far better than the S&P 500, which gained 202% over the same stretch.

Now, it appears the rally in restaurant stocks has fizzled out. The Dow Restaurant Index hasn’t set a new high since April, while the S&P 500 has set seven new highs in the last few weeks.

After outpacing the market for six years, restaurant stocks are now lagging. As you’re about to see, this is a serious red flag for the stock market. It could even mean that a U.S. recession is near.

• Wall Street has turned bearish on restaurant stocks…

Last Tuesday, investment bank Stifel Nicolaus downgraded 11 restaurant stocks. Stifel is warning investors to sell Panera Bread (PNRA) and Cheesecake Factory (CAKE). It even warned that Chipotle Mexican Grill’s (CMG) stock could fall by as much as 50%.

According to Stifel, restaurant sales have started to decline. It doesn’t expect business to pick up anytime soon either. It warned that restaurants could experience at least two years of sales “pain.”

Jefferies, another major investment bank, has also urged investors to get out of restaurant stocks. MarketWatch reported last week:

Coincidentally, analyst Andy Barish at Jefferies also downgraded multiple restaurant chains Tuesday, saying he was “calling the top of the restaurant cycle” after an “extensive” study suggested that the “industry has at least 18 months of challenges ahead” in terms of softer same-store sales and higher labor costs.

According to Barish, right now is “a time to be very, very picky and cautious about restaurant stocks.”

• You might not think this is anything to worry about if you don’t own any restaurant stocks…

But keep in mind, the restaurant industry can tell a lot about how the U.S. consumer is doing. Consumer spending makes up 70% of the U.S. economy.

Many analysts consider restaurant stocks a “leading economic indicator.” You see, when the economy is growing, folks eat out more often. Restaurants stay full. Their stocks do well.

When the economy slows, folks stop dining out as much. They cook more meals at home. And because going out to eat is a “discretionary” purchase, a slowing economy often hits restaurants before it hits grocery stores or health care companies.

That’s why we watch restaurant stocks so closely. They can tip you off to economic problems long before the problems become obvious.

• Some of America’s biggest restaurant chains are already starting to see a slowdown…

Last week, Buffalo Wild Wings (BWLD) reported that its “same-store sales” fell 2.1% in the second quarter. This metric measures how much sales rose or fell at stores that have been open for at least a year. Because it strips out sales increases from newly opened stores, it can tell you more about the health of a company than total sales.

The company’s CEO, Sally Smith, told analysts people are “very reluctant to spend a lot of discretionary dollars” right now. Other major restaurant companies have also voiced this concern.

Two weeks ago, Dunkin’ Brands (DNKN), which owns the giant coffee chain Dunkin’ Donuts, said its second-quarter sales grew just 0.5%. That’s down from 2.8% during the second quarter of 2015. According to the company’s CEO, consumers went into a “bit of a funk” last quarter.

Weak consumer spending has also hit Starbucks (SBUX). Its same-store sales grew half as fast last quarter as they did during last year’s second quarter. CEO Howard Schultz blamed the sales slowdown on a “profound weakening in consumer confidence”

• Stifel thinks restaurant stocks could crash before the end of the year…

Business Insider reported last week:

In the second half of 2016, Stifel expects a 20% decline in restaurant stocks — a decline that would look awfully similar to a trend seen ahead of each of the last three US recessions.

If that happens, other stocks could plunge too. The economy could even enter a recession. MarketWatch reported last week:

Westra [an analyst at Stifel] said restaurant stocks have dropped by an average of 23% in the three to six months before the start of the past three recessions, while the S&P 500 index has declined 10%…

“The catalyst for the current weak pre-recessionary restaurant spending trend is likely multifaceted — U.S. politics, terrorism, social unrest, global geopolitics, economic uncertainty — but, if history is a guide, we warn investors that restaurant-industry sales tend to be the ‘canary that lays the recessionary egg,’ ” Westra wrote.

• We encourage you to avoid most restaurant stocks…

If the economy enters a recession, restaurants could see their sales and profits plummet. You don’t want to own these stocks if that happens.

That said, people won’t stop eating just because the economy slows. But instead of going out to eat often, folks will cook more meals at home. That’s good news for companies that “put food on the table.” And it presents a big opportunity for folks who invest in these companies.

That’s why E.B. Tucker, editor of The Casey Report, is investing in companies that feed the average American.

One of those stocks, agricultural giant Archer Daniels Midland Company (ADM), has surged 45% since January. After its huge run, E.B. doesn’t recommend buying ADM at current prices. But there’s still time to invest in E.B.’s two other “feed the masses” stocks.

You can learn about these companies by subscribing to The Casey Report. If you sign up today, you can access E.B.’s top investing ideas for just $49 a year. That’s half off the regular price, and frankly one of the best deals you’ll come across…

You see, E.B.’s portfolio has gained 28% since the start of the year. That’s more than four times better than the S&P 500’s 6% gain. What’s more, Casey Report readers are set up to make money even if there’s a recession or a stock market crash. And that’s never been more important.

Read More @ CaseyResearch.com

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