Three more warning flags; A first look at Cracker Barrel; My great aunt was almost scammed
1) I don't think the stock market is in a bubble, but warning flags are mounting...
In fact, three more just caught my eye.
The first is a new article in the Wall Street Journal on the "meme market." It highlights how trading stocks is becoming speculative entertainment for more and more investors:
Memes, once confined to a niche area of markets, have rippled through many corners of finance, driving big rallies in everything from cryptocurrencies to some of the planet's largest companies. Corporate leaders are taking note, increasingly embracing their status as meme lords.
As the article continues, these so-called "meme lords" are making trading and investing in their companies' stocks "fun." But this blurs a line between investing and entertainment – which is concerning. Here's more from the WSJ:
The shares have also become speculative vehicles for many individual investors. Options trading in stocks including Palantir, Tesla and Strategy has hit some of the highest levels on record, according to Cboe Global Markets data.
Meanwhile, another article in the WSJ this week argues that record margin debt is not a sign of a market top. However, take a look at the chart below from the article...
It shows tops in early 2000, mid-2007, and late 2021 – right before market crashes:
Lastly, the chart below from a new post on social platform X shows something truly ridiculous – that there are more exchange-traded funds ("ETFs") than stocks. Take a look:
Again, I'm not saying we're in a bubble. But some more warning flags make me a bit more cautious. And of course, beware of getting sucked into "investing" in speculative meme stocks.
2) Turning to an individual stock that has been in the news recently...
Shares of restaurant chain Cracker Barrel Old Country Store (CBRL) have surged this morning. This comes after the company announced that it was reversing its silly move to change its logo from this:
To this:
The move was part of a "brand refresh." But it triggered a backlash that whacked the stock. So as the WSJ reports, Cracker Barrel decided to revert back to its "Old Timer" logo after the change sparked a "culture war":
The chain had replaced a logo from 1977, which included a man in overalls leaning against a barrel – "Uncle Herschel" – with a version featuring just its name. After the new logo was unveiled last week, some customers and online commentators said Cracker Barrel was abandoning its tradition and heritage in favor of a sterile look.
I agree with the company's decision – both to tamp down the furor and because the new logo is bland.
This reminds me of Netflix's (NFLX) decision in September 2011 to spin off its DVD-by-mail business from its nascent streaming one into a separate service called Qwikster.
Customers rebelled. And that forced Netflix to reverse its decision a few weeks later on October 10. However, the stock had cratered. And that created one of the best buying opportunities of all time for investors who bought amid the debacle – and held on...
NFLX shares closed at $15.95 on October 10, 2011. Yesterday, they closed at $1,226.09. In the chart below, you can see the colossal, long-term move higher:
So with this in mind, let's take a look at Cracker Barrel to see if the recent turmoil might have created a buying opportunity...
The stock was a big winner in the aftermath of the global financial crisis. After a big crash, it went on to soar over the next decade. It crashed again during the COVID-19 pandemic... and then rallied strongly. But since its pandemic-era recovery, the stock has lost roughly two-thirds of its value.
You can see the long-term move in the 20-year chart below:
So let's turn to the financials. We'll start with revenue and net income over the past 20 years. And it's not surprising to see that the stock has tracked the company's profitability over time:
Free cash flow ("FCF") tells a similar story: steady growth for many years, and a steep decline since 2021. Take a look at the chart below of the company's cash from operations, capital expenditures ("capex"), and FCF:
Turning to the balance sheet...
Cracker Barrel's net debt rose during the pandemic to cover losses. But it has been largely stable since then:
I wouldn't say roughly $1.2 billion of net debt is worrisome. But it's close to the company's roughly $1.3 billion market cap. So the debt level constrains Cracker Barrel's ability to return cash to shareholders.
Speaking of which, let's look at how the company has spent its FCF over the years:
There's not much of interest here...
Cracker Barrel bought back about $134 million of its stock in 2022, which was terrible timing. And the company slashed its dividend 80% from roughly $29 million per quarter from 2022 to 2024 to about $6 million each of the past three quarters. The stock currently yields about 1.7%.
In summary, I can see why Cracker Barrel pursued a brand refresh...
I wouldn't say the company is in trouble outright. But it has clearly struggled with stagnant revenues – as well as declining profits and FCF.
Meanwhile, the stock doesn't appear especially cheap. At a recent price earlier this morning of around $60 per share, that gives the company a market cap of roughly $1.3 billion.
Analysts estimate that the company will earn $3.14 per share this year and $3.33 per share next year. So with a roughly $60 per share price, the stock is trading at about 19.1 times this year's estimates and 18.0 times next year's.
And I would argue that those estimates are at risk due to the latest negative publicity. As the WSJ article that I cited earlier noted:
A survey of 1,000 U.S. adults by YouGov over the weekend found that 29% of people said Cracker Barrel's rebrand made them less likely to eat there, while 59% of people said it made no difference.
Putting it all together, Cracker Barrel looks like an easy pass.
It's trading at multiples that are roughly double what I'd be interested in paying for a now-controversial, mediocre business in decline.
3) Just as I warned my readers yesterday about one type of scam, I learned that my great aunt almost lost $10,000 last week...
She's in her 90s. Her computer had started making loud noises – and a number on her screen told her to call Microsoft (of course, it wasn't Microsoft – it was scammers).
They talked her into withdrawing $10,000 from her bank account, which somebody was going to pick up at her home. But fortunately, she realized in the nick of time what was going on and didn't lose her money. (Her son is replacing her computer now.)
Be careful out there... You must stay vigilant to avoid scams.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.