Hedge funds are about to pile into this stock. You can get in before them

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Today’s issue in preview:

• Hedge funds are about to pile into this stock. You can get in before them

• Here’s what insiders acting on privileged information are saying about the economy

• Learn our Top Themes to buy now

Here’s what insiders acting on privileged information are saying about the economy

Credit: Brett_Hondow

Bring on the unlimited breadsticks, the baby back ribs, and the shoebox-sized portions of cheesecake.

It’s time to celebrate a very positive trend at work inside the U.S. economy.

America’s largest and most popular “full service” restaurant chains are in a bull market and trading near all-time highs.

Over the past eight months, I’ve written over a dozen research notes analyzing the soaring share prices of highly economically sensitive industry groups, including trucking stocks, railroad stocks, regional banks, manufacturing stocks, steelmakers, shopping mall operators, and hotel chains.

At the end of each note, I pointed to their soaring stock prices and told readers that the U.S. economy is doing much better than most people think.

These economically sensitive firms are important “real world” indicators. They almost always do a better job of telling us what is happening in the economy than any media outlet or economist. And their uptrends are moving in a bullish upward direction for the U.S.A.

Today, we add the impressive uptrends in the market values and revenues of America’s leading full-service restaurant (FSR) chains to our list.

A full-service restaurant is one where you’re seated by a host, talk to a server, have your food brought to you, and hopefully leave a nice tip. This experience is different than a fast-food restaurant such as McDonald’s or Chick-fil-A.

It is also more expensive. The typical family of four going to a full-service restaurant knows it will be spending considerably more there than at a fast-food joint.

Because FSR bills are on the higher end of the dining cost spectrum, the earnings and stock prices of leading these chains are excellent “real world’ indicators that have a lot to say about the financial health of the American consumer. After all, dropping $150 on dinner is not something most people do when they are broke. It is something people are more likely to do when they are gainfully employed, making money, and optimistic about tomorrow.

America’s leading FSR operators are Darden Restaurants (DRI, Olive Garden, LongHorn, Yard House), Texas Roadhouse (TXRH), Brinker International (EAT, Chili’s), and The Cheesecake Factory (CAKE). Americans spend a huge portion of their FSR dollars with these four firms.

Collectively, these firms have recently reported strong business results. Driven by these results and bullish expectations, their stocks are in clear uptrends and are trading near all-time highs.

These uptrends tell us the American consumer is alive and well.

This news flies in the face of all the negative and alarming economic stories the mainstream media likes to run.

But remember, market prices are the sum total and final expression of all knowledge held by industry insiders, connected investors, government officials, and bankers who quietly control huge parts of the economy. These people know much more about their industries of focus than you or I do. Their knowledge manifests itself through action… and that action that sets market prices.

You can listen to whoever you like, but I’ll take the collective word of connected experts on this subject over journalists and media types who don’t know a bull market from a flea market. Add the bull market in full-service restaurants to our growing list of trends that are moving in a very positive direction for the U.S.A.

Hedge funds are about to pile into this stock. You can get in before them

Credit: Wachiwit

Uptrends. Bull markets. Booms. Gold rushes.

These are the sorts of things we look for at Money & Megatrends.

We’re looking to invest in themes and industries with massive runways for growth and prosperity. We’re looking to invest in industries with so much future demand and growth that, financially, we are running downhill… and playing the game of wealth building in “Easy” mode.

However, I’m the last person you’ll hear say that my way is the best way. When you hear someone say their way of investing or stock trading is the best way to do it, and this or that way is crazy, then you know you’re talking to an idiot. Having an open mind is having “investment enlightenment.”

When it comes to business and investment, there are many ways to succeed. You can do very well as a stock investor shopping in the bargain bin… looking through the stock market’s dumpster that is the new 52-week lows list… looking for cheap, beaten up companies that could be dealing with a serious but solvable problem and due for a turnaround.

With all this in mind, let’s talk Netflix (NFLX).

Netflix is the world’s largest subscription video streaming company, serving more than 300 million paid memberships in over 150 countries.

The company offers a vast library of movies, television shows, documentaries, and licensed content that subscribers can watch on demand. Its biggest competitive advantage is its ability to create hit programming, personalize recommendations with algorithms, and spread content costs across its huge subscriber base.

In its early years, Netflix generated losses as it invested in breakneck growth. Now a mature business, Netflix generates lots of free cash flow. Its trailing 12-month free cash flow is approximately $12 billion. Revenue growth in its most recent quarter was 13% year over year.

Although Netflix’s revenue and cash flow are growing at a healthy pace, the stock is down 45% over the past year and just reached a new 52-week low.

Before starting this downturn, Netflix enjoyed a huge rally and was due for a correction. The stock is now trading for about 22 times earnings, which is relatively cheap for a high-quality business like Netflix.

But far more important than what I think of Netflix is what other investors think of Netflix. I believe the company is about to have something going for it that you won’t hear about anywhere else except Money & Megatrends.

I’m willing to bet Netflix is about to have some of the world’s largest investors working in its favor. Giant hedge funds, mutual funds, and sovereign wealth funds are about to buy this beaten-up stock.

These giant funds often manage more than $20 billion… sometimes more than $50 billion.

When you manage that much money, you cannot buy small stocks like you can when you are managing “just” $1 billion.

For a stock position to make a meaningful positive impact on your fund’s results, you need it to represent at least 3% of your fund’s assets.

Most good managers would rather put 4%-8% of their fund into a stock idea they believe is truly great.

If you’re looking to put 3% of $10 billion to work in a great idea, that means you are looking to place $300 million. If you are looking to put 3% of $30 billion to work in a great idea, that means you are looking to place $900 million.

This means in many cases, big investment funds have to say no to a compelling stock investment because the amount of money they are looking to place is larger than the company’s market cap. Or, the amount of money they are looking to place would create so much buying pressure relative to the company’s market cap that it would drive the stock price way too high, preventing them from getting a good price.

Unfortunately for big investors, there simply aren’t many high-quality businesses trading at reasonable prices that also have the massive liquidity they need to invest.

If you look at the holdings of giant and well-known investors like David Tepper, Coatue Management, and Tiger Global, you see what I mean. They are all buying and selling the same gigantic companies with massive liquidity. They are all trying to be excellent at buying the likes of Meta (META), Google (GOOG), Nvidia (NVDA), and Netflix (NFLX). Fewer than 50 companies qualify here.

This means that when a high-quality firm like Netflix sells off due to a serious but solvable problem or because it needs to work off a high valuation, you can bet that mega hedge funds looking for business quality, bargain prices, and massive liquidity will step in to buy it. They simply don’t have many options.

With a market cap of $281 billion and average daily dollar trading volume of about $3 billion, Netflix has tremendous liquidity and the ability to absorb large amounts of capital.

So, keep an eye on Netflix in the $68 range, where it is trading right now. It’s quality growth at a reasonable price. And I bet four months from now, we will be hearing about how big hedge funds loaded up on the stock back in July.

Market Notes

• Oil refining giants Delek US Holdings (DK), Marathon Petroleum (MPC), Philipps 66 (PSX), and HF Sinclair Corp (DINO) are up at new highs amid the Iran War, which is constricting refined product supplies.

• Our November 17th recommendation to be long the biotech industry continues to perform well. Sophia Genetics (SOPH) just hit a new high and is now up 90% in the last year.

• Hotel REITs DiamondRock Hospitality (DRH) and RLJ Lodging Trust (RLJ) hit new highs today. These are bullish economic signals.

• Our March 20 recommendation to own semiconductor equipment stocks is delivering. Testing equipment small-cap Aehr Test Systems (AEHR) is up 20% today.

• Our February 13th recommendation to own the optics theme is still paying off. LightPath Technologies (LPTH) is up 14% today and 256% over the last year.

• The Boomer health care theme continues to generate winners. Senior living giant Welltower (WELL) reached a new all-time high today.

Regards,

Brian Hunt
Editor, Money & Megatrends

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