Renowned strategist Tom Lee says inflation could be ‘falling far faster than expected’ — here’s the 1 left-for-dead sector to bet on if that holds true

According to Fundstrat’s Tom Lee, rampant inflation may not last much longer.

“In the past week, we’ve gotten some data that I think really shows inflation could be falling far faster than expected,” the strategist tells CNBC earlier this month.

Lee notes the drop in gasoline prices. He also looks at indices that are showing signs of inflation slowing down.

“The [Institute for Supply Management Index] prices collapsed for the month of August, and that points to [Producer Price Index] potentially going to almost zero percent in a few months,” he says. “And I think the third thing that’s pretty encouraging is if you look at the composition of [Consumer Price Index], 42% of the basket is actually now in outright deflation.”

The headline number is still worrying. In July, consumer prices in the U.S. rose 8.5% from a year ago.

But Lee remains optimistic.

“I think there’s still positive surprise coming, and it’s the fact that inflation could cool off faster, and history shows that once it starts breaking, it falls very quickly.”

If you share this view, there is one sector that you might want to consider: restaurants.

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A beaten-down sector

The COVID-19 pandemic triggered one of the most challenging operating environments for the restaurant business in history. During the initial outbreak, restaurants in many regions were ordered to either shut down completely or only offer takeout. And even as the economy reopened, some restaurants still had to operate at reduced capacity.

Obviously, not all restaurants survived the pandemic. Yet those that did still have to face another challenge — spiking inflation.

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Wholesale food costs have gone up substantially. Wages have risen as well. Many restaurants have increased their prices to offset higher operating costs. But consumers don’t have an unlimited budget.

According to a CNBC survey earlier this year, 53% of Americans say that they have reduced their dining out spending due to rising prices.

The good news? There are signs that the inflation pressure is easing for the restaurant industry.

Making a comeback

When restaurant chain Wingstop (WING) reported Q2 earnings on July 28, it noted a decrease in food, beverage and packaging costs, which was mainly driven by an 18.8% year-over-year decline in the cost of bone-in chicken wings.

“We are in a unique position for the back half of 2022 where we are benefiting from meaningful deflation in bone-in wings, have a proven playbook, along with sales-driving levers that give us confidence in our ability to deliver on our outlook for 2022,” said Wingstop’s president and CEO Michael Skipworth.

Investors liked the news. On the day Wingstop reported earnings, its shares shot up 20%.

And that momentum has continued as Wingstop shares currently trade at $134.86 apiece.

Wingstop is not alone. Its peers, such as Cracker Barrel Old Country Store (CBRL), BJ’s Restaurants (BJRI) and Jack in the Box (JACK) have all rallied since Wingstop’s Q2 earnings release.

If this “meaningful deflation” persists, restaurant stocks might be able to see better days ahead.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.