Day: September 6, 2024

There’s a lot to like about Cava Group (NYSE: CAVA). The Mediterranean-style restaurant chain is growing like a wildfire while generating positive bottom-line profits. I understand why many investors are excited about this thrilling growth story, sending Cava’s stock price 152% higher in the last 52 weeks.

But I’m not going anywhere near the “buy” button for Cava stock in the foreseeable future. This soaring stock is flying too close to the sun and looks overdue for a sharp price correction.

That’s life in the risky and competitive restaurant industry.

Why investors love Cava’s growth story

Again, I get it. Cava opened 62 net new restaurants over the last year, including 18 in the recently reported second quarter. Menu prices are up by 4.9% in the same span in order to tamp down inflation-based increases in ingredient costs, and foot traffic per store rose by 9.5%.

The company generated $19.7 million of net income and $22.7 million in free cash flows in the second quarter. Investors get thrilling growth and an 8% net profit margin in a single package — where do I sign up?

That’s why Cava’s shares are soaring since entering the public stock market in June 2023. Unfortunately, I don’t think the business can support these lofty stock prices.

Cava’s high valuation ratios are concerning

That brings me to the uncomfortable bit.

Cava’s stock is trading at unreasonably high valuation ratios. Yes, it’s great to see that the company is profitable but it shouldn’t be worth 15 times trailing sales, 308 times earnings, or 1,155 times free cash flows.

Those are soaring ratios in any industry, and especially in the ultra-competitive restaurant sector. True giants like McDonald’s (NYSE: MCD) and Yum! Brands (NYSE: YUM) come with single-digit price to sales ratios and profit-based valuation multiples in the 20x to 30x range. Even the fast-growing Chipotle Mexican Grill (NYSE: CMG) chain nearly fits that modest valuation profile.

Financial risks in a crowded market

Just for fun, let’s run Cava through the rigors of a discounted cash flow (DCF) calculation. This valuation method estimates a stock’s value based on the amount of cash the underlying business might generate for shareholders in the long run. Using some incredibly generous estimates for Cava’s potential cash flow growth, I still get a “fair value” estimate of just $5 per share. Yes, it’s difficult to squeeze reasonable numbers out of the DCF equation when the cash profits are just above breakeven, but that’s kind of my point here. How do you pin a fair price tag on such a risky and barely profitable business?

And the ditches of Wall Street are littered with the remains of formerly high-flying restaurant stocks. Many were seen as “the next Chipotle,” just like Cava, with ambitious expansion plans to match. In many cases, they ended up stumbling over costly growth plans at the wrong time.

Remember Zoës Kitchen, for example? That was another high-growth Mediterranean restaurant concept, opening dozens of new locations per year in its heyday with long-term plans of a nationwide presence. Well, those plans didn’t work out and Cava bought what was left of Zoës Kitchen in 2018. Some of its locations have been converted into Cava restaurants and others simply shut down.

When would I consider buying Cava stock?

In all fairness, I’m not terribly keen on restaurant stocks in general. The industry is too packed with rivals, all reaching for the same consumer wallets in different ways. My only exposure to this fracas is Toast (NYSE: TOST), a maker of restaurant management hardware and software designed to save operating costs and improve their efficiency. This industry needs all the cost-saving help it can get.

And I’m a long way away from adding any Cava stock to that portfolio. I might reconsider if the unchecked growth continues without resorting to dilutive stock sales or risky debt papers along the way — but even then, only at a much lower valuation.

So I wish the best of luck to Cava and its investors, but I’m not even a little bit tempted to own the stock right now. Come back in a few years with sustained growth and a milder share price, and maybe I’ll finally reach for that ten-foot pole.

Should you invest $1,000 in Cava Group right now?

Before you buy stock in Cava Group, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Cava Group wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $661,779!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 3, 2024

Anders Bylund has positions in Toast. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Toast. The Motley Fool recommends Cava Group and recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

1 Stock I Wouldn’t Touch With a 10-Foot Pole — and Here’s Why was originally published by The Motley Fool

By David Shepardson and Rajesh Kumar Singh

WASHINGTON/CHICAGO (Reuters) -The U.S. Transportation Department (DOT) said on Thursday it is opening an inquiry into the four largest U.S. air carrier rewards and frequent flyer programs to ensure consumers do not face unfair, deceptive, or anticompetitive practices.

Transportation Secretary Pete Buttigieg sent letters to American, Delta, Southwest and United Airlines, ordering them to provide records and submit reports answering detailed questions on their rewards programs.

The Department is reviewing how consumers are “impacted by the devaluation of earned rewards, hidden or dynamic pricing, extra fees, and reduced competition and choice.”

Reuters first reported in December that DOT had begun scrutinizing the frequent flyer programs of major U.S. airlines for potential deceptive or unfair practices.

DOT and the Consumer Financial Protection Bureau held a public hearing in May on airline loyalty programs, while some lawmakers have also scrutinized the programs.

Buttigieg said the department is seeking “more specific data to better understand the largest rewards programs and identify potential competition or consumer protection issues or risks.”

Customers often complain airlines have been raising the bar to earn perks associated with these programs. The U.S. Congress last year considered but did not mandate requiring airlines to provide 90 days notice before devaluing frequent flyer program points.

Trade group Airlines for America, however, said U.S. airlines are transparent about frequent flyer programs “and policymakers should ensure that consumers can continue to be offered these important benefits.”

U.S. carriers relied on these programs, which have tens of millions of members, for revenue and to raise funds during the COVID-19 pandemic when travel demand plunged.

Loyalty programs of Delta, United and American were each valued more than $20 billion last year, according to consulting firm On Point Loyalty.

Delta said it has received the DOT’s inquiry and will respond.

Southwest said its flexible rewards program benefits have resulted in the carrier doubling the industry average of seats booked with points, while United and American declined comment.

(Reporting by David Shepardson in Washington and Rajesh Kumar Singh in ChicagoEditing by Chris Reese and Sandra Maler)

(Bloomberg) — Intel Corp. is considering options for its stake in its struggling automated driving systems provider Mobileye Global Inc. as part of a major strategy overhaul, people with knowledge of the matter said. Shares of Mobileye fell to a record low.

Most Read from Bloomberg

The chipmaker could offload some of its 88% holding in Mobileye on the public market or via a sale to a third party, according to the people, who asked not to be identified because the information was private. Mobileye has a board meeting later this month in New York, where Intel’s plans will be considered, one of the people said.

Mobileye shares fell as much as 9.3% to $11.45 after trading opened on Friday, reaching their lowest level since the Jerusalem-based company went public via a US initial public offering in 2022.

Founded in 1999, Mobileye provides software and hardware for self-driving systems. Intel already sold part of its stake in Mobileye last year, raising about $1.5 billion from the deal.

If Intel pushes ahead with trying to raise money using more of its holding in Mobileye, it will be doing it at a difficult time. Mobileye’s stock was down about 71% this year through Thursday, leaving it with a market value of roughly $10.2 billion.

Mobileye has suffered as automakers have reduced production amid a post-pandemic supply glut across the industry. Last month, it slashed revenue forecasts and lowered its projection for adjusted operating income to well below what analysts were projecting. The company is on course for a third-straight annual loss.

The latest deliberations over Mobileye form part of broader discussions between Intel and its advisers on ways to improve performance and navigate the most difficult period in its 56-year history. Bloomberg News reported last month that the company is studying a range of strategic scenarios, including potential M&A.

Network Unit

Santa Clara, California-based Intel is separately exploring options for its enterprise networking division, the people said. The business, which is called Network and Edge and manufactures chips for use in computer and telecommunications networks, saw revenue fall by almost a third last year to about $5.8 billion, results for the period show.

Intel has made no final decisions on its stake in Mobileye, or the networking business, the people said, asking not to be identified discussing confidential information.

Story continues

A representative for Intel responded in an emailed statement, “We have an unwavering focus on shareholder value creation and are executing the plan we shared last month to accelerate profitable growth and create a leaner, simpler and more agile Intel for the future.”

A spokesperson for Mobileye declined to comment.

Shares in Intel are down more than 60% this year. Chief Executive Officer Pat Gelsinger has launched an ambitious plan to regain his company’s lead in the semiconductor industry by building new plants and rapidly improving its manufacturing technology.

Intel had a net loss of $1.61 billion last quarter, and analysts are predicting more red ink for the year ahead, putting pressure on Gelsinger to pull off a turnaround. The company is discussing various scenarios, including a split of its product-design and manufacturing businesses. Intel’s board is expected to be presented with various strategic options during a meeting later in September.

–With assistance from Dinesh Nair.

(Updates share price in the third paragraph.)

Most Read from Bloomberg Businessweek

©2024 Bloomberg L.P.

Wall Street analysts don’t always make accurate predictions, but Tom Lee from Fundstrat Global Advisors has put together a string of impressive calls over the last couple of years. He said the S&P 500 index would hit 4,750 in 2023, and it closed the year at 4,769. He then predicted the S&P would hit 5,200 in 2024, which was the most bullish target on Wall Street at the time, and it surpassed that level within the first three months.

Lee also forecast a 50% gain this year for the Russell 2000, an index featuring approximately 2,000 of the smallest companies listed on U.S. stock exchanges. The potential for falling interest rates combined with cheap valuations are two key reasons for his prediction.

The Russell 2000 hit its high point for 2024 (so far) on July 16, and Lee came out on that very day and reiterated his bullish stance in an interview on CNBC. But the index has been trading down since then, and it’s sitting on a gain of just 10% for the year. That means it will have to climb by another 37.1% within the next four months to hit Lee’s target.

While that seems unlikely, the Vanguard Russell 2000 ETF (NASDAQ: VTWO) closely tracks the performance of the index, so it’s a simple way for investors to profit from Lee’s prediction if he turns out to be right.

The Vanguard ETF is a simple way to invest in small-caps

The composition of the Russell 2000 is very different from mainstream indexes like the S&P 500. The industrial sector is the largest in the Russell with an 18.9% weighting, followed by the healthcare sector at 15.1% and the financial sector at 15%. The largest sector in the S&P 500, on the other hand, is technology, with a sizable 31.4% weighting thanks to the rise of trillion-dollar tech giants like Apple, Microsoft, and Nvidia.

Plus, the top 10 holdings in the Vanguard Russell 2000 ETF represent just 3.2% of the total value of its portfolio, so its performance isn’t beholden to a handful of stocks:

Data source: Vanguard. Portfolio weightings are accurate as of July 31, 2024, and are subject to change.

Insmed is a biotechnology company that develops therapies for rare diseases. It has a market capitalization of just $13.1 billion, and as the largest holding in the Vanguard ETF, it puts the size of the Russell 2000 companies in perspective.

Story continues

Sprouts Farmers Market, on the other hand, is a grocery chain with over 400 stores (and growing) across America. It specializes in healthy and organic foods. Then, there is Fluor, a construction and engineering company that builds energy and urban infrastructure.

Outside of its top 10, the Vanguard ETF also holds popular names like clothing retailer Abercrombie and Fitch, cybersecurity powerhouse Tenable, and semiconductor-service company Axcelis Technologies. Simply put, the ETF (and, by extension, the Russell 2000) is very diversified.

Falling interest rates should benefit small-caps

“The time has come for policy to adjust.” Those were the words of Federal Reserve chairman Jerome Powell at the Jackson Hole Economic Symposium last month. The Fed has been locked in a battle to tame high inflation for the last two years, which saw the federal funds rate climb to a 23-year high of 5.33% in 2023, where it remains today.

But with the Consumer Price Index measure of inflation nearly back to the Fed’s 2% annualized target, the central bank looks set to cut rates at its next meeting on Sept. 17 and 18. In fact, according to the CME Group‘s FedWatch tool, there could also be cuts in both November and December.

Lower interest rates tend to benefit small companies more than their larger counterparts. Behemoths like Apple, Microsoft, and Nvidia are sitting on so much spare cash that they each return tens of billions of dollars to shareholders every year through dividends and stock buybacks. In other words, they don’t need to rely on debt financing.

Smaller companies, however, often borrow money to fuel their growth, and they tend to carry a high amount of floating-rate debt, which is highly sensitive to changes in interest rates. Falling rates will increase the borrowing capacity of small-cap companies and reduce their interest payments which will be a direct tailwind for their earnings.

Lee thinks those factors could also drive the valuation of the Russell 2000 higher. Right now, the index trades at a price-to-earnings (P/E) ratio of 17.7 (excluding companies with negative earnings), which is much cheaper than the S&P 500, which trades at a P/E ratio of 27.4.

With that said, investors pay a premium for the S&P 500 because of the quality of its constituents like Nvidia, Apple, and Microsoft, which have long-term track records of success, secure revenue streams, and fortress balance sheets. It’s possible the Russell 2000 will trade at a higher valuation when interest rates fall, but I don’t expect it to completely close the gap with the S&P.

Will Tom Lee be right?

Lee’s prediction for a 50% return in the Russell 2000 this year is ambitious. In fact, going all the way back to 1988, the index has never recorded an annual gain of 50% or more.

The Vanguard Russell 2000 ETF has delivered a compound annual return of 10.4% since its inception in 2010, so a 50% move would be highly unusual. That also represents a notable underperformance relative to the S&P 500, which has delivered a compound annual return of 13.7% over the same period.

Keep in mind that the federal funds rate was below 1% for the majority of the period between 2010 and 2022, and that wasn’t enough to propel the Russell to outsized returns. The Russell 2000 could climb further in the remainder of 2024, but it’s unrealistic to expect a 37.1% gain from here to reach Lee’s year-end target.

With that said, small caps might be a good place to invest some money as interest rates fall, so adding the Vanguard Russell 2000 ETF to a balanced portfolio isn’t necessarily a bad move.

Should you invest $1,000 in Vanguard Russell 2000 ETF right now?

Before you buy stock in Vanguard Russell 2000 ETF, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Vanguard Russell 2000 ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $661,779!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 3, 2024

Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Microsoft, Nvidia, and SPS Commerce. The Motley Fool recommends CME Group, Sprouts Farmers Market, and UFP Industries and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

1 Vanguard ETF That Could Soar 37.1% Before the End of 2024, According to a Select Wall Street Analyst was originally published by The Motley Fool

Savvy investors often look to billionaire portfolios for quality dividend stock ideas. Ray Dalio, founder of Bridgewater Associates, has a stellar reputation for spotting promising investments. Despite Dalio’s retirement in 2022, his influence remains evident in the hedge fund’s recent moves.

In the second quarter of 2024, Bridgewater Associates purchased shares of three tier 1 dividend stocks: ExxonMobil (NYSE: XOM), Medtronic (NYSE: MDT), and Microsoft (NASDAQ: MSFT). Let’s examine each of these stocks to determine if they deserve a place in your dividend portfolio.

ExxonMobil: An energy giant with an attractive yield

ExxonMobil, one of the world’s largest integrated oil and gas companies, has long been a favorite among dividend investors. The company offers a compelling yield of 3.29% with a conservative payout ratio of 44.9%. Over the past decade, ExxonMobil has grown its dividend at a modest rate of 2.66% annually.

The stock’s performance has been mixed, with a 10-year return of 16.5% excluding dividends. However, when including reinvested dividends, the total return jumps to 80.1%. While impressive, this still lags the S&P 500‘s total return (including dividends) of 231% over the same period. ExxonMobil currently trades at an attractive forward price-to-earnings (P/E) ratio of 12.1.

Upside catalysts for ExxonMobil include its response to shareholder concerns, such as reduced spending, new board appointments, and emission reduction targets. The company’s shift toward liquids pricing and high-value integrated operations could improve cash margins, particularly with new volumes from the Permian Basin and Guyana.

However, ExxonMobil faces significant downside risks. The company’s continued investment in long-life hydrocarbon projects could lead to stranded assets if oil demand peaks and declines sooner than expected. Additionally, ExxonMobil’s relatively low investment in low-carbon businesses compared to peers may pose challenges in adapting to a changing energy landscape.

Medtronic: A top healthcare innovator

Medtronic, a global leader in medical technology, offers a compelling combination of stability and growth potential. The stock yields 3.15%, although its high payout ratio of 93.2% may raise some eyebrows. Over the past decade, Medtronic has grown its dividend at a healthy rate of 6.3% annually.

The company’s stock performance has been modest, with a 10-year return of 38.3% excluding dividends and a total return of 75.7% including reinvested dividends. Like ExxonMobil, this trails the S&P 500’s performance. Medtronic trades at a forward P/E ratio of 16.3.

Story continues

Medtronic’s upside potential stems from its dominant market position in core heart devices, spinal products, insulin pumps, and neuromodulators. The company’s robust pipeline, including treatments for atrial fibrillation, mitral valve disease, and renal denervation for hypertension, could open up new large markets. Medtronic’s innovative approach to applying familiar technologies to new medical challenges is another strength.

On the downside, Medtronic faces increasing competition in the insulin pump market, which could threaten its leadership position. The company is also indirectly subject to Medicare reimbursement rates, and increasing pressure on payments could hurt profitability. Product recalls, although infrequent, remain a concern that requires ongoing attention and resources.

Microsoft: A tech giant with a growing dividend

Microsoft might not be the first name that comes to mind for dividend investors, but the tech giant has been steadily increasing its payout. The stock offers a modest yield of 0.73% with a conservative payout ratio of 24.8%. Over the past decade, Microsoft has grown its dividend at an impressive rate of 7.6% annually.

Where Microsoft truly shines is in its stock performance. The company has delivered a staggering 10-year return of 810% excluding dividends, and a total return of 965% including reinvested dividends. This significantly outperforms the S&P 500. Microsoft trades at a premium forward P/E ratio of 30.8, reflecting high growth expectations.

Microsoft’s upside potential is driven by its strong position in the public cloud market with Azure, which is benefiting from the evolution to hybrid and public cloud environments. The continued success of Microsoft 365, with customers willing to pay for better security and additional features, is another growth driver. Microsoft’s dominant positions in operating systems and office software serve as cash cows to fuel growth in other areas.

However, Microsoft faces some downside risks. The momentum in shifting to subscriptions is slowing, particularly in mature products like Office. The company lacks a meaningful mobile presence, which could be a disadvantage in an increasingly mobile-first world. Additionally, Microsoft is not the top player in some of its key growth areas, notably Azure and Dynamics, which could limit its potential in these markets.

Should you follow Bridgewater’s lead?

Dalio‘s Bridgewater Associates has been buying three diverse dividend stocks, each offering unique attributes for income-focused investors. ExxonMobil provides a high yield and long dividend history, but it operates in a rapidly changing energy sector. Medtronic offers stability and growth potential in the high-growth healthcare industry. Microsoft, while offering a lower yield, sports a strong dividend growth record backed by a powerful tech business.

Are these dividend stocks worth buying? For income investors, ExxonMobil, Medtronic, and Microsoft are always worth considering. These three companies have shown a rock-solid commitment to rewarding shareholders with regular dividend payments and increases to their quarterly cash distributions. They also sport entrenched market positions, ensuring long-term profitability.

So, if you’re looking for a trio of top dividend stocks to add to your portfolio, these three Bridgewater Associates holdings may be worth a closer look.

Should you invest $1,000 in Microsoft right now?

Before you buy stock in Microsoft, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Microsoft wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $661,779!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 3, 2024

George Budwell has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft. The Motley Fool recommends Medtronic and recommends the following options: long January 2026 $395 calls on Microsoft, long January 2026 $75 calls on Medtronic, short January 2026 $405 calls on Microsoft, and short January 2026 $85 calls on Medtronic. The Motley Fool has a disclosure policy.

Billionaire Ray Dalio’s Former Hedge Fund Is Buying These 3 Top Dividend Stocks. Should You? was originally published by The Motley Fool