It May Be Time To Take A Bite Of Food Stocks As Recession Fears Still Loom

Zinger Key Points
  • The consumer sentiment index is currently 10 index points higher than the all-time low that was reached in June.
  • The consumer sentiment for the current economic conditions increases by 9.9%.

In October, buying conditions for durables climbed to 23% as prices and supply constraints eased. Consumer durables typically last more than three years, and the easing price conditions can help prop up firms such as YETI Holdings Inc YETI and Apple Inc AAPL as the holiday season approaches.

Investors should still be wary about 2023 as year-ahead expected business conditions worsened by 19%, according to University of Michigan Surveys of Consumers Director Joanne Hsu.

What Happened: Early Friday, the university released its Surveys of Consumers consumer sentiment index, which revealed that consumer sentiment increased by 2.2% from September.

Additionally, consumer sentiment for the current economic conditions increased by 9.9%, which comes as a surprise as the preliminary results forecasted it lower than expected.

The consumer sentiment index is currently 10 index points higher than the all-time low reached in June, which was attributed to weaker consumer spending.

Why It Matters: As energy prices have fallen by 11.7% in the past three consumer price index (CPI) reports, consumers are feeling more purchasing power as less of their weekly spending expenditures are going towards filling the gas tank.

Consumers are feeling high prices everywhere, but one thing that is a guarantee is that everyone needs to eat.

With the median expected year-ahead inflation rate rising to 5.0%, and stagflation still in question along with other macroeconomic headwinds, consumer staples and discretionary name-brand chain restaurants such as Wingstop Inc WING should continue to capture profits, especially as food prices fall.

Wingstop President and CEO Michael Skipworth mentioned in the third quarter earnings press release, "We've opened 167 net new restaurants through the third quarter and are on track to have a record year for restaurant development, enabled by significant bone-in wing deflation strengthening our brand partners' unit economics. This gives us confidence in our ability to deliver another record-setting year for Wingstop."

Furthermore, the largest fast-casual chain restaurant in the U.S., Chipotle Mexican Grill, Inc. CMG, saw chicken prices and avocado prices decline by 30% and 40%, respectively, since the start of the second quarter of 2022.

As food away-from-home inflation is less than food-at-home prices, such as purchasing groceries, discretionary fast-casual chain restaurants had their costs come down, while purchasing power remained relatively elevated.

Also Read: This Chipotle Analyst Sees Further Upside In 2023 As The Cost Of Dining-In Overtakes Dining Out

The Last Word: As uncertainty over inflation looms with the long-term inflation expectations reverting back to 2.9%, it could also be a safe bet to invest in firms in consumer staples, as this sector is filled with products considered necessities.

If the U.S. economy falls into a recession, everyday household products manufactured by Colgate-Palmolive Company CL and Procter & Gamble Co PG will not be left out of the consumer's shopping cart.

Photo: Mallika Home Studio via Shutterstock

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Posted In: Large CapLong IdeasMid CapNewsRestaurantsEcon #sEconomicsTrading IdeasGeneralConsumer SentimentCPIUniversity of Michigan Consumer Sentiment Index
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