FA Alpha Weekly Digest 05 20 2024

Wall Street’s stock picks can’t be trusted and the advertising bias of the mainstream financial media makes their news only sensationalist-driven. Gain an edge by knowing the trends that matter and some of the mispriced stocks in the market.

We bring you the FA Alpha Weekly Digest, a roundup of FA Alpha’s unique and unparalleled equity, credit, and macroeconomic insights over the past week.

In today’s digest, we’ll cover the Goldilocks economy, Vistra (VST), Starbucks (SBUX), Middleby (MIDD), and MGP Ingredients (MGPI).

Finding silver linings in ‘‘bad’’ data

The recent U.S. job report has ignited optimism among investors and economists. April saw the addition of 175,000 jobs, the smallest increase in six months, coupled with a sluggish 3.9% rise in average hourly earnings over the past year as the slowest in three years. However, rather than signaling economic trouble, this slowdown hints at a potential shift towards a 'goldilocks' economy, characterized by moderate growth without overheating. Investors are hopeful for interest rate cuts, potentially in September, as the Fed aims to maintain this balanced economic environment. This favorable climate, particularly for microcap stocks, could lead to significant growth opportunities as borrowing becomes more accessible and room for expansion increases in a low-rate environment.?

This utility giant defied industry norms and capitalized on electrification trends

Vistra is a utility company that has defied the industry's slow-growth stereotype by diversifying its electricity generation assets. With a large capacity, Vistra serves millions of customers and has benefited from growth in data centers and electrification. The company's revenue and stock price have surged in recent years, leading to its inclusion in the S&P 500. However, potential interest rate hikes and regulatory changes pose risks for investors.

Inflation is brewing trouble for this coffee giant

Starbucks (SBUX) recently slashed its full-year guidance due to rising input costs and declining same-store sales in North America and internationally. Despite coffee being a daily staple, the company struggles with profitability as it faces challenges in passing rising costs onto customers without dampening demand. The market's high valuation multiples for Starbucks indicate continued high expectations, which may be difficult to meet under current economic pressures and increasing competition. Former CEO Howard Schultz has highlighted significant operational issues in U.S. stores, underscoring the need for substantial improvements. These factors suggest that Starbucks' competitive edge may be eroding amidst macroeconomic headwinds.

This kitchen supplier stands to benefit from rate cuts

Interest rates are expected to fall in the U.S., making it cheaper for businesses and consumers to borrow money. This could be a recipe for success for Middleby (MIDD), a leading commercial kitchen equipment manufacturer. Lower borrowing costs would boost the demand for Middleby's equipment and make it easier for restaurants to buy their products. Moreover, Middleby benefits from the residential market, where falling mortgage rates could lead to more kitchen renovations requiring new appliances. This dual exposure to both commercial and residential markets makes Middleby a company to consider for investment as interest rates decline.

Creating a spirits powerhouse

The acquisition of Luxco for $475 million in April 2021 significantly transformed MGP Ingredients by expanding its product portfolio into branded spirits. Historically a bulk alcohol and specialty ingredients supplier, MGP integrated vertically, leveraging its distillation facilities to supply Luxco's diverse brands like Ezra Brooks and Yellowstone. The acquisition reduced Luxco's supply risks and inefficiencies, creating substantial synergies. MGP invested over $16 million in expanding distillation capacity and integrating operations, leading to increased production efficiency, higher operating income, and a rise in stock price rise, highlighting MGP's long-term potential.

We hope you find this week’s FA Alpha Daily articles insightful.

See you next week as we talk about another set of interesting names.

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