This is true, but at the same time, if your wheel bearing will rebuild well, it is not much (if any) worse than a cheap new one, so its hard to say that replacement is necessary. If you have Normandy hubs, you should first rebuild (disassemble, clean, regrease, reassemble, adjust) them and see if they feel good. If they do, you will have something that is probably better than current low-cost parts are. If you cold-set the frame, you should be able to find a rear axle with cones and spacers that will let your old hub be wider, and fit into the cold-set frame properly.

OTOH, the same stores that have replacement wheels for 126 6-speed-freewheel have some for 120 5-speed-freewheel. Here I'm mainly thinking of Niagara, and there are others. There might not be any real point to even cold-setting the frame, if your 5-speed freewheel gives you a gear range you can ride and is otherwise in good condition. Often they just need some oil dribbled in to turn ship-shape.

Tom is right, it will be easy to think of this like you're setting up a racing bike, but it could not have been one, even when new. Make it a reliable and fun bike for your own utility, and separate the "fixes" and "upgrades" into necessary and optional categories. Then you'll be able to decide what it needs versus what's just gonna make it nicer to ride.

When you get a chance, disassemble the brake calipers, clean everything, straighen or renew whatever's bent, and reassemble with greased pivots and spring bearing points, and a careful adjustment. This will work wonders in how your brakes will feel with your new clean lubed or lined cables. Get some Koolstop pads next.