The Way to 'PLAY' Stagflation
I've spotted two stocks, including Dave & Buster's Entertainment, and a sector, that should help investors navigate a slow-growth, high-interest-rate environment.
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Regardless of one’s political stripes, investors should welcome the clear-cut election decision. The prospect of the outcome hinging for weeks on litigation across multiple swing states and the uncertainty that would bring to equities is an outcome that gratefully has been avoided. Investors now have a clear lay of land going forward and can act accordingly.
As I highlighted in my column on Monday, a "slugflation," or stagflation, environment appears to be an increasingly likely scenario. Economic and job growth are clearly slowing, the last mile on the inflation front is going to be a slog, and interest rates are much higher than most pundits and Fed Chairman Jerome Powell thought they would be after the Federal Reserve implemented a half percentage point cut to the Fed Funds rate at the Federal Open Market Committee meeting in mid-September.
There are few industries that have suffered more from the heightened levels of inflation over the past few years than the restaurant sector. That will continue to be the case in a stagflationary environment. Restaurant chains and individual owners will remain challenged as input prices continue to move higher, albeit at a slower pace. Passing those price hikes on to an increasingly beleaguered consumer is less and less of an option. This is why we continue to see the continued march into bankruptcy by many well-known restaurant brands, TGI Fridays being the latest.
I continue to have no exposure to the sector for those reasons, with one exception. That is Dave & Buster's Entertainment, Inc. PLAY. The company is in the process of remodeling its locations and still throwing off considerable cash flow. The restaurants are as much for entertainment as for dining. The stock also saw some new insider purchases in October from its CEO. In addition, the company should benefit from some trading down volume. Many families may not be able to afford the annual trip to Disneyland in this economy, but can still take the kids for an afternoon of games and wings. The stock also trades for just over 10 times next fiscal year’s estimated profits.
Commodity stocks should also benefit from stagflation, much as they did during the late 1970s and early 1980s. Gold has shot up over the past year and is just off record highs. I also think oil should find a floor soon, and I am overweight the energy sector. I added some exposure to E&P concern HighPeak Energy, Inc. HPK this week. The company easily beat bottom-line expectations with its third quarter results on Monday. HighPeak has generated positive free cash flow for five straight quarters now as production continues to increase, some $36.1 million in the third quarter. Management is paying down debt (some $90 million year to date) and the company is well-positioned if energy prices rebound, which I think is likely in the quarters ahead.
At the time of publication, Jensen was long HPK and PLAY.
