After steep declines these four restaurants stocks are approaching support levels.
A confluence of factors, from an improving job market and low gas prices to the notion people were spending on “experiences over things” were supposed to be a boon to restaurants.
Yet despite higher wages and prices at the pump staying near multi-year lows for the better part of the past 18 months the shares of companies across the restaurant sector, from fast food to high end steak houses, not only failed to outperform during the first part of the year but have suffered a near collapse of late.
In fact, of the 49 publicly-listed chains with a market cap of over $50M more than half the sector is showing a negative YTD return, despite a steady 6% return for the S&P 500 Index.
The latest blows came last week when hamburger chain Sonic (SONC) issued a warning that its fourth quarter earnings would come in lower than expected sending shares down some 7% to $25.40, just above its 52-wek low. Wednesday also saw sandwich shop Cosi (COSI) finally put itself and its shareholders out their long time suffering by declaring bankruptcy.
So what wrong and is it time to scrounge for some tasty buy opportunities?
Two of the biggest drags on the sector come from issues that cut both ways; the increase in wages, especially at the lower end of the pay scale puts more money in consumers’ pockets but also increases chains number cost. Higher payroll has more than offset the lower input costs of low raw food prices on everything from proteins to grains.
In fact, the low cost of food has made eating out to an all-time high relative to eating at home.
For example, egg prices, for instance, hit a 10-year low this summer, and beef prices are lower than they have been in more than three years. Mike Andres, the departing president of McDonald’s American said of food prices, “If I’m not mistaken, it’s the biggest gap we’ve seen in the last 10 years,” business, told reporters in July. “This is clearly impacting the whole eating-out industry.”
Food deflation has also destroyed shares of supermarkets such as Kroger (KR) and Supervalue (SVU) which already operate on razor thin margins. But that’s a disaster for another day.
Other trends also seem to working against the restaurant chains:
- The sameness and generic aspect that once was considered a positive as it promised consistency of price and quality are now simply viewed and boring and tired. People are opting for the local ‘mom & pop’ location that offers that ‘artisanal’ experience that millenniums value so highly.
- Take out and online ordering mitigates the need to go out. It’s not surprising that pizza chains Dominoes (DPZ) and Papa John’s (PZZA) are two of the best performing stocks, up a whopping 45% and 76% year to date. When not just opting for something cheap and easy like pizza apps such as GrubHub (GRUB) have also made it easier to order in from the aforementioned ‘local’ place rather than going to a drive through.
- Trends toward healthier eating. As mentioned above more people are choosing to shop and cook at home finding they can make better meals cheaper. And even on this front, ready to cook deliver services such as Blue Apron and Hello Fresh are providing consumers with a compelling balance of taking much of chore out of shopping and cooking and still offering up quality and variety.
But eating out will remain staple for many people basic food consumption and entertaining choices. Here are four different chains whose business is still solid and but shares have been beaten down and valuations are becoming attractive; let’s scroll through some charts and identify some appetizing entry points.
1.Jack-in-the-Box (JACK) which had been a star performer as it Qdoba Mexican Eats stole share from beleaguered Chipotle (CMG) seems to have run out of steam with a double top near the $102 level. The company has managed to deliver solid 8%-10% increases for same store sales for the past four quarters. I’d now look to see if support will hold near the gap at the $95 level.
- Buffalo Wild Wings (BWLD) since hitting an August high of $173 shares have slid some 25% in just the past two months, and are down over 45% from all-time high. It failed to hold support at the $150 level but has a secondary level near $142.
With the seasonal trends kicking, peak sports of baseball playoffs, college and pro football and basketball seasons kicking into gear this could be a good area to start nibbling from the long side.
- Texas Roadhouse (TXRH) brings us a little higher on the food chain in terms of price point but it too has seen shares slide 20% since the summer highs despite a steep decline in beef prices. The company only has 500 locations and management thinks it could double that number over the next 5-7 years. Shares are now at key support near the $40 level.
McDonald’s (MCD). The good old golden arches. I think this standard bearer of burgers will prove the test of time for its broad appeal, newly streamlined menu and value oriented approach. People are starting to appreciate that when they want fast food MCD is a reliable old friend.
Last week the company boosted both its dividend and its buyback program which should lend support to the stock price. Shares are near important support level at the $114 level.
In all cases I’d be patient and wait for the attractive risk/reward entry points near support levels. And of course I’d use options to limit my risk and leverage my upside potential.
Steve Smith is an expert options trader with 25 years experience in the markets. Steve was a seat-holder of the Chicago Board of Trade (CBOT) and the Chicago Board Option Exchange (CBOE) from 1989 – 1997. Steve is currently the editor of The Option Specialist and runs the 20K Portfolio Program which provides all types of options trades for all types of traders.