Buy This, Not That: What to Buy in Case of a “Hard Landing”

Shah Gilani|September 18, 2024

Time will tell how the market reacts to today’s rate cut announcement from the Fed. But an increasing number of folks are talking about a “hard landing” for the economy.

Is a recession imminent? Did the Fed wait too long to cut rates?

Most consumers won’t know what’s about to hit them until it’s too late. But for investors, there’s at least one smart move you can make today…

It involves a sector that does well in good times and bad… but does particularly well when consumers’ backs are against the wall.

I’m talking about fast food.

In today’s Buy This, Not That, we’ll size up two popular fast food stocks and see which is best positioned for success right now.

Click here or on the thumbnail below to dive in.

 

TRANSCRIPT

Hey, everybody. Shah Galani here with your weekly BTNT as in Buy This, Not That. Now it’s Wednesday, and we know what that means. It’s Fed decision day. One of the things before I get into something to buy and something probably not to buy – or something that’s a better buy right now than something else – I wanna talk about the Fed.

Expectations are for a 50 basis point cut. Now the Fed fund futures expectations went from 50 percent to 63 percent in a matter of days because it looks like, well, maybe CPI is under better control than we thought. It looks like, well, maybe the labor market’s a little softer than we we thought. It looks like maybe the fed is a little behind.

And if we’re falling into recession, they better darn cut 50 basis points. Hence, the Fed fund futures are 63% betting that it’s gonna be 50 basis points. If it’s a 50 basis point cut, that’s probably a little scary. That’s likely going to imply that the Fed is worried about a hard landing, is worried about a recession.

Consumers, as much as they’ve been spending – we just got spending numbers on Tuesday, a little better than expected as far as retail sales. Holy mackerel. So consumers are just doing fine, but not if you look at all their debt. So at some point, the consumer may hit a wall.

If they do, what we’re gonna talk about today has to do with, oh, if there is a 50 basis point cut because consumers are gonna get up against the wall. If we are headed towards a recession, then we’re gonna talk about fast food restaurants because you guys wanted to know what did I like better, McDonald’s (MCD) or Wendy’s (WEN)? And those two great companies, I like both McDonald’s and Wendy’s. I have to admit, I’m bit of a fast food nut.

Don’t eat it all the time, but I do love them all. Now thing about McDonald’s is it’s been a great stock, but I look at it right now and say, well, where is it going? This is a two hundred and twelve billion dollar market cap company that’s just absolutely wonderful.

Best by far profit margins in the fast food business at something like 32-plus percent profit margins. Absolutely. Operating margins, like, close to 50 percent. I think they’re about 47 and some change.

So let’s take a look real quick at what the stock looks like chart wise, and you can’t fault it, people. It’s just it it’s McDonald’s. If you take a look at this, how do you not like this? Except, oh, wait a second.

As far as I’m concerned, great profit margins, great hot margins, great stock, but it’s kind of just kind of nowhere.

Yes. It’s approaching its all time highs again, and it looks good. So, you know, we got this nice high here. We got this heading back up here, but we had a heck of a dip very nicely above the 200, very nicely above the 50.

And McDonald’s looks really good. Again, it’s on the past 52 weeks, it’s up 6.67 percent. And that’s pretty okay, but not great. They have to start cutting prices because their value meals are not a value anymore, and they’ve been talking about having to reduce prices because people are complaining a lot.

I was in California not that long ago with a buddy on our way someplace that said, let’s get some McDonald’s when we get some gas. There’s a McDonald’s right there. Couldn’t wait to go to McDonald’s. And I gladly picked up the check for the two of us.

It was almost $30 for two of us, For big mac fries and a Coke and holy what?

Yeah. So they need to do a little bit. That means they’re gonna start to have to bring prices down. Now the margins, yeah, they may come down a little bit, but they’re they’re so solid.

I wouldn’t worry about that. I worry about where’s the stock going. Here’s a one year chart on a two-year basis. Where’s it going?

Alright. On a three-year basis, it looks good, but I’m not sure where it’s gonna go.

Now take a look at Wendy’s.

As far as Wendy’s goes, well, I like Wendy’s better. I’d I probably would have to be honest and say I like McDonald’s hamburgers somewhat better. Certainly like their french fries better. But Wendy’s I could take Wendy’s all day every day. So looking at Wendy’s, and it’s a tiny wee thing compared to McDonald’s. Market cap for Wendy’s $3.6 billion versus $212 billion market cap for McDonald’s.

But Wendy’s been a little bit beaten up. As far as the trailing 12 months, stock is down about 13 percent. Now profit margins here pale in comparison to McDonald’s, but McDonald’s is the exception in the fast food business.

Wendy’s profit margins, about nine and a quarter percent. That’s pretty good, but certainly nothing near McDonald’s. But I do like the stock better. I like a stock that’s been a little beaten up this coming up to its 200-day.

Now Wendy’s has made some good inroads in 2023. Their numbers were pretty good. Sales were up four percent on a same store basis. They had a they had a killer breakfast rollout, took a lot of business from McDonald’s as far as breakfast.

They’re looking at the breakfast sector as a really good growth area, and I think they’re gonna do really well. I think breakfast now breaks in close to seven and a half percent of of the revenue for Wendy’s, and it’s really pretty recent. So they’ve done a great job. And, again, they’re eating into McDonald’s, literally.

So Wendy’s, I I like where they have to go. It’s cheap. McDonald’s is close to 300 bucks, people. And where is it going to go?

Wendy’s at $17.77. Here’s what I like about Wendy’s. Wendy if if Wendy’s does well, and I think it could because the numbers again were for 2023 were really good.

Sales pretty good, up 4.3% same store sales. Revenue was up 4.2 percent in 2023. And there’s something else I like about Wendy’s. It’s got a dividend yield. McDonald’s has a small dividend yield, not even worth talking about. Certainly not worth buying a stock for. But Wendy’s has a dividend yield of 5.64 percent.

5.64 percent. Now that’s something to talk about.

The only problem with that juicy dividend yield is they’re paying out about 102% of the net income available to common shareholders. So they’re gonna have to bring in more net interest to common shareholders out of which they pay the dividend because they’re bumping over 100% on the payout ratio. Now I think it’s a symbol. Another thing I like about McDonald’s, which has excuse me, about Wendy’s raising their dividend is they raised it last year from 12 cents to 25 cents a quarter. It’s fantastic. Okay. That’s a big pop.

Very big pop. Why would they raise it so much? Well, one of the reasons is, oh, just shy of 10 percent of the outstanding shares are held by insiders. They wanna pay themselves.

They see the stock doing well. I see the stock. I like Wendy’s down here at $17.7-… we’ll call it even $18. We’ll give it a little bump to $18. It can very easily get to $21. That’s about a nice 16, 17 percent move. And if you look at Wendy’s on a two-year basis, and Wendy starts to pick up share from McDonald’s, which I think they’re going to do, especially what they’ve done already in the breakfast space, I think we can get up to $24, $25, which would be now we’re talking about a close to 40% gain in a year.

That’s a heck of a gain. You’re not gonna get that out of McDonald’s. So I like buying Wendy’s here and not McDonald’s.

I’ll eat it, the one of them. I would flip a coin on that one. But as far as your BTNT, it’s Wendy’s over McDonald’s.

Be careful out there. Keep an eye on the Fed because if it’s a 50 basis point cut and it’s because they see a recession coming, both Wendy’s and McDonald’s are caught in do better. And then Wendy’s, I think, will do a lot better.

Cheers. Catch you guys next week.