The headline is that markets continue to push higher. However, a deeper look at sector performance reveals increasing bearishness on the consumer. The market’s most dominate theme remains the capex cycle and innovation around artificial intelligence, along with expected productivity gains. I think the market is right to focus on this, even if some of the names riding this wave will not be among the long-term winners. On the other hand, the U.S. economy remains primarily a consumer economy, with consumer spending representing more than two-thirds of economic activity. No amount of AI is going to offset a material pullback in consumer activity.
From that perspective, I think it is interesting to take note of recent trading in restaurant stocks, one of the sectors I follow closely. The average restaurant stock has dropped 13% since the start of the third quarter. In contrast, the S&P 500 is up 8% over the same period. This is a big spread. Why are restaurant stocks being sold off? I attribute it to two factors. Firstly, recent softer employment data has made the market less bullish on incomes. Secondly, investors are anticipating that tariff-related inflation now hitting retail shelves will pull spending from somewhere.
If the consumer weakens, it has to start somewhere, but is this just noise?
My view is that the impact from tariffs on the consumer and the economy remains undecided. Since liberation day I have had the distinct pleasure of talking to retail and restaurant companies every week about price changes, elasticity, sourcing, and planning related to the current tariff roulette wheel. The main takeaway is that most retailers have delayed the tariff impact longer than initially expected and worked to mitigate much of the hit with various strategies. The bottom line is that the prices you will see around Holiday will be still higher for certain discretionary categories (which tend to be imported) but the spike will not be as great as previously thought. Companies are also obfuscating tariff related increases by using sophisticated analytics to spread price increases throughout assortments. In other words, you will still pay more, but the increases will be less obvious. Instead of poorer and angry, you’ll be poorer and left wondering how it happened.
I think it makes sense to be cautious, but both the consumer and the economy continue to prove to be very resilient. The sell-off in restaurant stocks is an indication that professional investors have soured on consumer discretionary spending. The reasons behind this make sense, in my opinion. Nevertheless, I am not ready to call this signal the canary in the coal mine for the overall economy. Tariffs and their impact are more than noise, but they are also volatile and external and therefore not the kind of criteria I would use to select individual stocks. Instead, I continue to focus on businesses with strong financial positions, good management teams, and the ability to grow. If possible, I want to buy when these are trading at a discount to their long-term potential.
We recently gave a presentation on Match.com (MTCH) at value investing conference.*
In September I attended the Fatalpha Value Investing Conference (Cyprus). The conference brings together processional managers and some private investors from the U.S., Europe, Africa, the Middle East and even Asia. It sounds really serious but it’s unclear whether the main reason to go is the professional stock ideas, the copious amounts of food, the chance for a last swim in warm weather, or for a ride on a pirate ship. This year the private ship was fully booked so we sourced a submarine instead. Anyway, last year I pitched retailer Five Below (FIVE) and the idea was very successful with the shares hitting a new 53-week high today.
This year I went slightly out of my comfort zone and presented on online dating app operator Match.com (MTCH). MTCH is the largest operator of online dating apps with Tinder, Hinge, Match, Ok Cupid and a host of other sites under its corporate umbrella. MTCH’s problem is that Tinder (its most profitable brand) has been losing subscribers and Gen Z seems less interested in hooking up or even leaving their homes. My optimism on the company stems primarily from changes made by new CEO Spencer Rascoff who started in February of this year. He is reorienting Tinder to optimize user outcomes, replacing a focus on monetizing the user base. My view is that reframing to solve for the user’s experience stands a very good chance of stemming the attrition of Tinder subscribers. This in turn should lead investors to pay more for the shares. There is more to the case but too much to include here. If you are interested, I can send you a copy of the deck. Just send me an email.
*This is not a recommendation. Please consult your advisor for investment advice tailored to your risk tolerance and investment profile.
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The author of this letter and accounts managed by Quo Vadis Capital have a long position in shares of MTCH.
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