Key points
- Now that the Fed is creating uncertainty about the timing of potential interest rate cuts, investors may be looking for safer places in the economy to put their purchasing power and still get a decent growth profile.
- Domino’s Pizza and Papa John’s are the stocks that fit the profile of the best of both worlds in this uncertain environment.
- There can only be one price action and institutional buyers tell you which one sticks.
- 5 stocks we like best from Prudential Financial
Most of the market is now focused on the hype of high-flying technology stocks, where names like them NVIDIA NASDAQ:NVDA continue to deliver insane financial results to help the stock repeatedly surpass all-time highs. However, there is added value in “defensive” stocks, characterized by their immunity to the underlying economic cycle; that’s why it’s like this today.
The Fed announced that it would seek to cut interest rates this year, while the market initially began to discount these expectations by March. Now, comments indicate that there will be no cuts in March but rather by May or June of this year, a trend you can see in the FedWatch tool offered by the ECM Group NASDAQ: ECM.
Because of this uncertainty surrounding the timing of interest rate decisions, which act as the main driver of the underlying business cycle, indecision about the direction of interest rates means indecision about the direction of cyclical stocks, which is one reason why whose titles like Domino’s Pizza NYSE:DPZ AND Father John NYSE: PZZA may soon catch the attention of investors, but more on that later.
Deferred rotation
Knowing what you know now, it would be easier to understand that investors and traders would look at more active names like consumer discretionary stocks. As the timing of these interest rate cuts is now in question, these same investors would likely seek safety in less volatile sectors.
What if you could get the best of both worlds here? Being part of the SPDR Consumer Discretionary Select Sector fund NYSEARCA: XLY and the food sector, Domino’s and Papa John’s could provide the safety of a non-cyclical business with the exciting stories found in opposing cyclical stocks.
Since the Consumer Discretionary sector has underperformed the broader S&P 500 index by as much as 5.3% over the past six months, there is a small performance gap to close for the sector to catch up with the rest of the market . Which of the two titles could prove to be the more interesting proposition?
Keep in mind that it is safety you are looking for in this environment, at least until there is a clear direction on where the Fed can swing interest rates.
As for the food services sector, the ISM PMI Services Index shows three consecutive months of expansionary activity, placing the odds in your favor for an earnings improvement in that sector. Finding the growth area in the discount discretionary sector, it is time to seek safety.
Volatility typically poses risk to investments, so it makes sense to look for low-beta stocks in this group to get the best return with the least risk possible. Anything above 1.0 is considered risky, while anything below is considered safe.
Domino’s stock inherits a beta of just 0.84; check security. On the other hand, Papa John’s has a beta of 1.18, which is not the best option if you are looking for a smooth ride.
Does the market agree?
Domino’s stock is trading 99.0% of its 52-week high, which could represent fresh momentum to return to its all-time high of $567.6 per share, which hasn’t been seen since 2021. Papa’s stock John only stand at 81.0%. of its high prices in 52 weeks.
It’s clear where the market is willing to put its money somewhere between the two, but here’s more evidence to support that view.
It’s not just retail investors willing to buy Domino’s stock; The Goldman Sachs Group NYSE:GS AND Prudential finance NYSE:PRU they increased their holdings in the stock by 13.1% and 169.0%, respectively. Additionally, the market continues to price the stock in a way that represents a further bullish view.
While Papa John’s shares trade at a P/E ratio of 25.7x, Domino’s commands a 7.3% premium to its highest multiple of 27.6x. The saying “It has to be expensive for a reason” applies here, and now you have a better idea of what that reason is.
A low beta with favorable price action, operating in a sector that is likely to report growth in financials (per PMI trends), there’s no denying there’s a little more juice to squeeze out of Domino’s, at least this that could potentially be the case for you until the Fed comes back with more specific direction.
Before you consider Prudential Financial, you’ll want to hear this.
MarketBeat tracks Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and Prudential Financial wasn’t on the list.
While Prudential Financial currently has a “Reduce” rating among analysts, top analysts believe these five stocks are better buys.
View the five stocks here
Click the link below and we’ll send you MarketBeat’s list of seven stocks and why their long-term prospects are very promising.
Get this free report