Here’s a little-known stat. American summer camps import approximately 25,000 counselors each summer through the J-1 visa cultural exchange program. Like many industries, camps are facing labor shortages this summer. If I were aware of a publicly traded camp company, it would be on my list of stocks to avoid.
Other industries expected to have troubles include restaurants, hotels, ridesharing, trucking, waste management, retail and many others that involve low wages and close personal contact with customers.
“American businesses of every size, across every industry, in every state are reporting unprecedented challenges filling open jobs. The worker shortage is a national economic emergency, and it poses an imminent threat to our fragile recovery and America’s great resurgence,” U.S. Chamber of Commerce President and CEO Suzanne Clark stated on June 1, as reported by Forbes.
So, if you’re looking for stocks to avoid, I would start with these seven obvious choices and go from there.
- Uber Technologies (NYSE:UBER)
- Casey’s General Stores (NASDAQ:CASY)
- RCI Hospitality Holdings (NASDAQ:RICK)
- Darden Restaurants (NYSE:DRI)
- Red Robin Gourmet Burgers (NASDAQ:RRGB)
- Macy’s (NYSE:M)
- Marriott International (NYSE:MAR)
Stocks to Avoid: Uber Technologies (UBER)
If you are an Uber driver these days, your pay has gone through the roof. CEO Dara Khorowshahi said in early May that some drivers are making as much as $40 per hour. That’s because fares have surged to meet the high demand and low driver supply.
According to Business Insider, more than half of Uber’s drivers quit driving during the pandemic. So to get drivers back, it’s upped its driver incentives to put more drivers on the road. Ultimately, Bank of America predicts the current labor shortages will disappear early in 2022.
In the meantime, Uber users will have to get used to much higher fares per ride as surge fares kick in to fill the void.
Long-term, while Uber managed to get more than 100,000 drivers back in May, investors could find that Uber drivers decide the lower wages aren’t worth it once the surge fares disappear. Alternatively, users could decide it’s cheaper to walk.
And, one can’t forget that Uber still loses billions of dollars each year.
Casey’s General Stores (CASY)
If you’re a longtime investor in Casey’s, you’ve done very well. Over the past 10 years, CASY has had an annualized total return of 19.2%, significantly higher than the entire U.S. market as a whole.
While Casey’s has its own internal distribution network, it still has faced empty gas pumps at some of its stations in recent weeks. It seems the shortage of truck drivers has hit the convenience store industry, which relies on gasoline sales to lure customers into its stores to buy chips and pop and other grocery items.
This isn’t a company-specific issue. All across America, gas stations and convenience stores are experiencing fuel shortages due to the driver shortage.
“There’s not enough truck drivers to bring that gasoline, which is sitting in storage tanks, to the stations,” Patrick De Haan of GasBuddy.com told Minnesota television station KARE in May.
“We’ve been hearing about this issue since 2017, pre-pandemic. And it’s only grown worse as more drivers have retired than entered the system.”
Until the pandemic is in the rearview mirror, investors can expect more of these gas shortages.
Stocks to Avoid: RCI Hospitality Holdings (RICK)
The idea of visiting a strip joint before the pandemic began definitely wasn’t on my bucket list. Now, in the later stages of the pandemic, I can’t imagine anyone who would want to work in that kind of business environment regardless of the pay.
Nonetheless, the company celebrates the fact the late Anna Nicole Smith met her billionaire oil tycoon husband while dancing at Rick’s Cabaret has made a ton of money for investors over the years.
An investment in RICK 15 years ago has delivered an annualized total return of 17.4%, 671 basis points higher than the U.S. market as a whole.
So, why am I calling it a stock to avoid? In one word: valuation.
In the trailing 12 months (TTM) ended March 30, RICK had sales of $122.3 million. Based on a market capitalization of $655.8 million, it’s trading around 5.34 times sales.
I often look at free cash flow yield to determine if a stock is fairly valued or not. Its TTM FCF is $13.8 million. Based on the same market cap, it has an FCF yield of 2.1%. Anything above 4% is what I would consider overpriced.
Strip clubs might not be facing labor shortages. However, they probably should be.
Darden Restaurants (DRI)
In April of this year, I wrote an article about seven restaurant stocks to buy to ride the newest food and beverage hospitality trends. Darden Restaurants made the cut because it was streamlining its menus at Olive Garden and Longhorn Steakhouse to improve the efficiency of its kitchens.
However, when I read an article from The Washington Post detailing how a 64-year-old retired from working in restaurants during the pandemic after almost 40 years, I wasn’t nearly as impressed.
It turns out the Pennsylvania man started working in restaurants in 1982, earning $2.13 an hour plus tips. Last year, when the pandemic hit, the man worked at Olive Garden earning $2.82 an hour plus tips. After he got furloughed from his job outside Pittsburgh last spring, he retired, citing safety as his biggest concern about returning to the restaurant industry.
“The main issue for me was safety,” Conway told the paper. “There are lots of people who don’t want to participate in the old ways.”
I’m sure there are two sides to this story.
However, the fact that Olive Garden had the audacity to pay someone so little at 64 years of age suggests the hourly wage reckoning faced by the restaurant industry today is only going to intensify due to the pandemic.
I did not feel good about recommending Darden after reading the story. You shouldn’t feel good about owning it.
Stocks to Avoid: Red Robin Gourmet Burgers (RRGB)
Red Robin CEO Paul Murphy told Yahoo Finance at the end of May that he could see the labor shortage plaguing his chain subsiding by early summer.
That’s a good thing because Red Robin’s been forced to reduce its operating hours at some locations due to the lack of employees willing or able to work for the burger chain.
As retail and warehousing companies boost wages to attract and keep employees, the increased competition from other service industries has made it difficult to staff locations. That, in turn, has reduced sales.
While the company has initiated several processes to improve its hiring process while also improving same-store sales despite the labor shortages, analysts feel RRGB stock has run too far in 2021.
“With the stock up almost 76% YTD (vs. the S&P 500 +11.5%), we see shares potentially taking a step back as 1Q results bested stale Street expectations and continued to lag the industry, including a choppier recovery in May,” restaurant analyst Jon Tower wrote in a May 28 research note to clients, as reported by Yahoo Finance.
“ … [W]e do see reasons to remain cautious, including rising labor costs, which could throw a monkey-wrench in the long-term margin recovery and given the relatively low starting point (e.g., pre-pandemic EBIT margin of <1%), the company does not have much room for error.”
There are better restaurant stocks to own, in my opinion.
Like most retailers, Macy’s is scrambling to find employees to fill open positions. Macy’s Chief Financial Officer Adrian Mitchell discussed the labor situation during its Q1 2021 conference call in May. Mitchell specifically stated that the department store was facing “a higher level of open positions across the business.”
The reality is that no one wants to work in retail because customers, already insulting before the pandemic, have become an absolute horror during Covid-19.
A recent Business Insider article about Starbucks (NASDAQ:SBUX), a company generally considered a good employer in terms of pay and benefits, highlights the labor problems faced by the retail industry.
“Employees have been fired or people are quitting because we’re so overworked and stressed and abused,” an employee at a Midwest Starbucks told Insider in May.
“A Louisiana barista echoed the same complaints. The ‘handful [of customers] that you get each day who will berate or abuse you can take a drastic toll on your mental well being,’ he told Insider.”
My wife worked in retail management for more than 20 years. The stories she would tell. Thankfully, she left to start her own construction business. The best move she ever made.
Until retail pay employees better than average wages, it will continue to face worker shortages in a post-pandemic world.
Stocks to Avoid: Marriott International (MAR)
As a Canadian, I’ve always found it interesting that despite 29 states requiring a minimum wage higher than the federally mandated minimum of $7.25 an hour, the U.S. federal government still can’t get the minimum wage raised to a more realistic level.
And before you say it’s none of my business, I will tell you that Canada has a ways to go before it gets to Bernie Sander’s call for a $15 minimum wage, or 18.12 CAD an hour. The closest is the territory of Nunavut. It pays 16 CAD per hour. The next highest is British Columbia at 15.20 CAD per hour.
But I digress.
Marriott CEO Tony Capuano recently admitted that while business is recovering rapidly due to increased vaccination rates, finding employees to work is very difficult.
“We have had some labor challenges in those leisure destinations where we have seen demand spike so quickly,” Capuano told Yahoo Finance Live. “So in South Florida, Texas, Arizona we are running job fairs and we are providing some one-time hiring incentives to get the hotels staffed.”
For businesses such as Marriott, these problems could be short-term in nature. Once the generous unemployment benefits end, people will be forced to get back to work in one form or another.
Or, organized labor may convince low-paid hotel and restaurant workers that the time for a labor revolution is now.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.