A major economic indicator is flashing a warning sign…
And if the data doesn’t improve, it could mean we’re in for a recession next summer.
The indicator we’re referring to might surprise you. It’s not a fancy market metric or benchmark index…
We’re talking about the restaurant/arcade Dave & Buster’s Entertainment Inc. (PLAY).
Today, we’ll explain why this stock is one of the best gauges of economic health… and why the company’s recent numbers should scare the sh*t out of you.
The ultimate indicator of consumer health
Last week, Dave & Buster’s reported its latest earnings results…
And it absolutely bombed the quarter.
The company reported a measly $1.12 in earnings… much worse than expectations of $1.73. Meanwhile, same-store sales were down 5.6% year over year.
It’s worth noting that the earnings look even worse when you consider the company bought back $50 million worth of shares (2.5% of its float) during the quarter. Bear in mind, buying back stock should boost earnings because you’re dividing the results by a smaller number of shares.
Another sign of weakness: The company leased back two of its own buildings for $45 million. (Put simply, it sold some of its real estate to help raise cash, and then leased the properties back from the buyers.) While this doesn’t always indicate trouble… combined with the abysmal quarter, it raises some red flags—namely, that the company is desperate for cash.
So why should Dave & Buster’s results alarm you?
Because it’s the ultimate consumer discretionary stock.
It provides no necessary services. It’s purely for fun. In other words, Dave & Buster’s is a perfect example of non-essential spending.
And when families and individuals start cutting back on fun activities, it’s like a canary in a coal mine. It’s one of the first signs that consumers are starting to worry about their finances, which can be a sign of an upcoming economic downturn.
And this isn’t a one-off with Dave & Buster’s… You can see the same trend playing out across other discretionary stocks.
For instance, Five Below also reported horrible results for the past two quarters… pushing the stock from around $200 down to $115.
The super-deep-discount retailer is another prime example of a discretionary stock… You don’t go there to buy anything you need. You go when you have a few extra bucks to throw at cheap junk that will probably be broken within a month. So when you need to cut back on spending, it’s an easy cut to make.
It’s worth noting that discretionary stocks aren’t the only ones feeling the pain. The pullback in spending is even starting to trickle out into consumer staples… High interest rates and changing spending habits are forcing major retailers like Target and Walmart to lower grocery prices—something we haven’t seen in years.
Put simply, it’s clear consumers are preparing for tougher times… and that spells trouble for the economy.
How to prepare for a coming recession
Given these signs, it’s wise to prepare for a recession next year. Companies with high debt and poor growth prospects are particularly at risk. Investors should be cautious about investing in such companies, as they’ll likely suffer the most in a downturn. A good indicator of trouble is when a company talks about “restructuring.” It usually means it’s struggling to make ends meet.
Instead, consider diversifying your portfolio to include more resilient sectors—like technology. Tech stocks are doing well… and they’re likely to keep riding the AI trend higher.
For instance, the latest Dollar Stock Club pick is a chip supplier poised to surge as Apple launches its new AI-ready iPhone… Get the pick today when you join today.
And tune in to Wall Street Unplugged for more insights and strategies to stay ahead of market trends.
