The start of the US Federal Reserve cutting cycle ushers a new era in the investment world after one of the longest bull runs. Major US Indices are at record highs, well supported by an economy that has shrugged off the adverse effects of high interest rates. A resilient economy has been the catalyst behind companies delivering better-than-expected results, helping shore up sentiments in the equity markets. With the S&P 500 at record highs, so are stocks trading close to 52-week highs on valuations that are getting out of hand.
The first interest rate cut comes amid growing concern about a slowing US economy depicted by weakness in the labor market, slowing manufacturing, and weak consumer purchasing power. The impact of high interest rates for a long time is already being felt on consumer purchasing power taking a hit to the detriment of small and medium businesses.
Likewise, Ray Dalio the founder of Bridgewater Associates believes the Fed faces a tough balancing act as it commences the cutting cycle. In an interview with CNBC, Dalio reiterated that the Fed must find a way to keep interest rates high to prevent inflation edging higher and keeping them low enough to offer support to an economy that is facing an enormous amount of debt.
While there were fears that a steeper interest rate cut could be the worst outcome for stocks on fueling concerns about the economy’s health; that has not been the case. The upward momentum in the equity markets appears to have gathered steam depicted by the S&P 500 at all time highs after the cut.
Disappointing economic data in recent months has been the catalyst behind BTIG analyst Jonathan Krinsky reiterating that the risk-reward in the near term is now skewed to the downside regardless of what the Federal Reserve does. The sentiments come amid concerns that the Fed might have waited too long before cutting.
According to Krinsky, consumer staple stocks remain the most susceptible to significant downside risk. That’s because it is one of the sectors that has felt the full brunt of high interest rates taking a toll on consumer purchasing power.
On the other hand, the real estate sector, especially home-building stocks, could be big winners on the Fed cutting by 50 basis points. In the three months leading up to the rate cut cycle, homebuilders stocks outperformed the S&P 500, and building materials have also seen success. Over the last quarter, shares of homebuilders have risen by 26%, while building materials have seen a 13% increase, in contrast to the S&P 500, which has only gone up by 2%.
Shaniel Ramjee, who co-leads the multi-asset division at Pictet Asset Management’s London branch, mentioned that his group has been purchasing shares of U.S. financial firms in the past few weeks in preparation for expected interest rate reductions.
The analyst is confident that the financial sector will gain from a steepening yield curve due to increased support from lower interest rates for consumers and greater economic activity when interest rates are reduced.
Stocks trading near the 52-week highs could face pressure as valuation scrutiny gathers momentum. Uncertainty over the upcoming US presidential election could also weigh significantly on overvalued stocks trading close to their 52-week highs. Consequently, now could be the best time to pay attention to stocks that are trading near their 52-week highs and are moderately shorted.
Our Methodology
We used the Finviz stock screener to scan for companies that are trading near their 52-week highs and have high short interest. We identified 25 stocks that fit our criteria and then picked the 14 that were the most popular among elite hedge funds. The stocks are ranked in ascending order, based on their short interest.
At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
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A Chili's Grill & Bar restaurant filled with happy customers enjoying a meal.
Number of Hedge Funds holding stakes as of Q2 2024: 33
Brinker International, Inc. (NYSE:EAT) is a consumer cyclical company that owns, develops, operates, and franchises casual dining restaurants. The company’s core business depends on consumer purchasing power and the economy’s health.
With interest rates remaining high for a long time, the economy has started cooling off, and consumer purchasing power has taken a significant hit. Nevertheless, the parent of Chili’s and Maggiano’s Little Italy has been shrugging off fetch concerns owing to its solid fiscal fourth-quarter results. Brinker International, Inc. (NYSE:EAT)’s final three months concluded in June, and the number of visitors to its dining locations during this time was unexpectedly robust. A close to 6% increase compared to the previous year and higher prices resulted in a 13.5% rise in sales at its stores during the fourth quarter. This contributed to an increase in total annual earnings to $4.4 billion, marking a nearly 7% rise from fiscal year 2023.
The company’s profit margin continues to raise concerns. The company’s full-year diluted earnings per share of $4.10 came below analysts’ estimates. Management projecting earnings of $4.75 a share for fiscal 2025 was also below expectations.
After digging through 912 hedge fund portfolios for this year’s June quarter, Insider Monkey discovered that 33 had bought stakes in the firm. Brinker International, Inc. (NYSE:EAT)’s biggest shareholder out of these is D. E. Shaw’s D E Shaw through a stake worth $131 million.
Overall EAT ranks 5th on our list of the worst 52-week high stocks to buy according to short sellers. While we acknowledge the potential of EAT as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than EAT, check out our report about the cheapest AI stock.
