We recently published a list of 10 Worst Affordable Stocks To Buy Right Now. In this article, we are going to take a look at where Brinker International, Inc. (NYSE:EAT) stands against other worst affordable stocks to buy right now.
How is the Market Performing Entering the Rate Cuts
In one of our recent articles regarding the 10 Hot Penny Stocks On the Move, we discussed how the overall macroeconomic conditions have played a crucial role in building an environment leading to the upcoming Fed rate cut. Here’s an excerpt from the piece:
“The economy of the United States has stabilized, the risks of a recession have been delayed, and inflation continues to cool down. On August 30, Reuters reported that the Federal Reserve received a fresh confirmation regarding inflation continuing to ease. The personal consumption expenditure price index rose 2.5% year-over-year in July and inflation has stayed within the 2% goal set by the Fed. Fed Chairman has indicated that the “time has come to cut rates”.
Moreover, in another report by Reuters on the same day there were reports of the US dollar gaining as another key inflation measure fell in line with the forecasts. The Fed is expected to cut rates by 25 basis points this month. Moving forward markets have forecasted 100 bps of cuts by the end of 2024.
The stock market is already riding the tide of expected interest rate cuts. On August 20, CNBC reported that the stock market was climbing yet again, putting the S&P 500 and NASDAQ on track for their eighth positive session in a row, marking their longest winning streak this year.”
While there has been a debate about a 25-point or a 50-point cut, the market has fluctuated before the announcement. On September 17, CNBC reported that the S&P 500 was lower after reaching a record high on Tuesday. The market reached a new record high of 5,670.81 and was down 0.1% at 5,627. The Nasdaq moved 0.1% higher whereas the Dow Jones fell by 40 points.
The traders have overcome the summer headwinds and moved past the concerns over the health of the US economy on the back of expectations of the Fed cutting interest rates. On the other hand, Wall Street has been on hold. Analysts are hoping the rate cuts will help boost the earnings growth for companies.
Tom Lee, Fundstrat Global Advisors co-founder, joined CNBC to talk about how the market is expected to perform moving into the fed rate cuts and after the announcement. Lee believes that one of the factors leading to confusion among investors is the election period. The market is expected to stay in a fluctuating environment for the next eight weeks until the elections are over. However, fed rate cuts are coming at a crucial time to give some positive for the market.
There are two main reasons leading up to the rate cuts, one being the inflation easing and the other being the slower labor market that needs help from the Federal Reserve. Moreover, Lee thinks that regardless of the Fed deciding on a 25-point or 50-point cut, the result is going to be positive for the market. He thinks that investors should be confident for the next 12 months as whenever the Fed cuts rates, the win ratio for the markets has been almost 100%. Moreover, the markets rally post-elections regardless of who takes the seat.
Our Methodology
For compiling the list of 10 worst affordable stocks to buy right now, we used the Finviz stock screener. We set our filters to get affordable stocks with high short interest i.e. stocks trading below the market average Forward P/E which is 23.79, expecting positive earnings growth this year, and have high short interest. From the list of affordable stocks, we selected 20 stocks that were most widely held by institutional investors. Once we had the aggregated list, we ranked them based on their Short % of Shares Outstanding, sourced from Yahoo Finance. Please note that the list is ranked in ascending order of the short interest.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A Chili’s Grill & Bar restaurant filled with happy customers enjoying a meal.
Brinker International, Inc. (NYSE:EAT)
Forward P/E Ratio: 15.06
Earnings Growth This Year: 14.10%
Number of Hedge Fund Holders: 33
Short % of Shares Outstanding: 16.21%
Brinker International, Inc. (NYSE:EAT) is a casual restaurant company that owns, develops, and operates franchises of its restaurant brands. It operates through two main business segments including the Chili’s and Maggiano’s. The company owns more than 1,600 restaurants in the United States and 27 other countries.
The restaurant company is one of the worst affordable stocks to buy right now. Affordable because it is trading at 15 times its forward earnings, a 5% discount to its sector. And worst because it has a high short interest as a percentage of shares outstanding standing at 16.21%.
But that does not necessarily mean that it is not a viable investment opportunity. Brinker International, Inc. (NYSE:EAT) is popular among hedge funds in the second quarter 33 hedge funds had stakes in the company. Their total stakes amounted to $663.56 million. D E Shaw is the top shareholder with a position worth more than $131 million.
Being widely held by institutional investors is not the only positive thing about the company. It pretty much-surprised investors when its Q2 sales which topped analysts’ expectations. Its revenue for the quarter was $1.21 billion against the expectation of $1.16 billion.
The company’s same-store sales rose 11.9% year-over-year with free cash flow margins at 6.9% (up from 0.7% during the last year). These encouraging financials along with the raised EPS guidance for fiscal 2025 indicate on-going and upcoming profitability. Management expects EPS for the fiscal 2025 to be at around $4.55 (Midpoint).
Choice Equities Capital Management made the following comment about Brinker International, Inc. (NYSE:EAT) in its Q4 2022 investor letter:
“Our holdings are generally performing as anticipated. As a general statement, despite the potential economic headwinds, we continue to expect growing cash flows, and in nearly all cases operating margin expansion, into next year and beyond. Restaurants – Signs suggest our restaurant margin expansion thesis continue to play out as expected, as restaurants have historically been slow to walk back inflation-based menu price increases with their customers by lowering prices even if incoming food costs decline. Papa John’s Inc. (PZZA) and Brinker International, Inc. (NYSE:EAT) continue to execute well.
We continue to find new attractive investments, particularly under a broader theme of normalization. Somewhat like our restaurant margin expansion thesis, we are finding ample opportunities in other industries where companies look poised for margin expansion on the back of cost relief from normalizing prices on items such as freight, cotton or merchandising margins.”
Overall EAT ranks 1st on our list of the worst affordable stocks to buy right now. While we acknowledge the potential of EAT as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than EAT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.