Despite high unemployment and economic uncertainty, people have continued to eat at restaurants. Below, MoneyShow.com contributor Kate Stalter points out five restaurant stocks showing excellent combinations of fundamental and technical strength.
Consumers and businesses have continued going out to restaurants and spending money, even in a shaky economy. While many stocks have been struggling below key moving averages in the recent market volatility, several restaurants are trading at or near all-time highs.
Pizza restaurants, in particular, are standouts, with a few chains delivering fresh price action that’s far outpacing the broader market.
Papa John’s (PZZA) is trading just below its 2006 all-time high of $37.96. The stock rallied to fresh five-year highs this week, with huge trading volume on Monday, a day when the Nasdaq notched big gains in lower turnover.
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Revenue growth vaulted out of single-digit range in the most recent quarter, coming in with a 12% year-over-year increase. Wall Street expects 2011 earnings of $2.14 per share, up 17% from last year.
The stock is extended beyond its last technical buy point, but watch for its next consolidation to offer a buy-on-the-dip opportunity. The company will report its fourth quarter sometime around January 31, so watch the stock’s behavior prior to that release.
Industry peer Domino’s Pizza (DPZ) has been capitalizing on a revamped recipe and an expansion of international sales. The stock bolted nearly 14% in mid-October, following the company’s third-quarter earnings report.
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Domino’s forecast that fourth-quarter results would be helped by a new line of artisan pizzas, priced at $7.99, positioned as a value for price-conscious consumers who still want an out-of-the-ordinary experience.
The rate of earnings growth has increased in each of the past three quarters. Wall Street expects income of 48 cents per share in the current quarter, a 20% gain from a year ago. The revenue growth rate accelerated in the past two quarters, and is expected to show a gain of nearly 7% in the next report.
On its chart, Domino’s pulled back last week, along with the market. Though it fell 6.1%, it found support at its ten-week moving average, and institutions have stepped in this week, buying more shares, propelling the rebound.
The current consolidation could offer a buy opportunity. Watch for the stock to clear resistance above $33.70, preferably in heavy volume.
|pagebreak|Nano-cap Pizza Inn Holdings (PZZI) is another pie-maker that’s been earning some dough lately. Income has increased at triple-digit rates in the past couple of quarters, and revenue performance stabilized after declines in late 2009 and early 2010.
The company, which operates more than 200 restaurants in the southern part of the US, as well as dozens of locations overseas, has a market cap of only $45 million. It trades 149,000 shares per day.
With a company that small, institutional ownership tends to be sparse, and that’s the case here. For a retail investor, thinly traded nano-caps can be riskier than, for example, an S&P 500 component which has scores of institutional owners. With a thin stock, one fund can decide to unload shares, sending the price sharply lower.
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However, that has not been a problem for Pizza Inn, which has notched an incredible year-to-date gain of 191%. Monthly upside volume has been trending higher since September, and the stock is working on its fourth month in a row of gains.
Pizza Inn seems ready for a pullback. It held up extremely well in last week’s market carnage, getting support above its 20-day average. But if it can make an orderly retreat to its 50-day and digest recent gains, that could be a set-up for a fresh rally.
Turning to menu items other than pizza—and also looking to the other side of the market cap spectrum—Dow component McDonald’s (MCD) has been consolidating above its ten-week line, trading just 2% below this month’s all-time high.
Throughout the economic downturn, the company has gotten a lot of attention as an inexpensive, reliable source of a fast meal. Mickey D’s has continued to revamp its product offerings—a hallmark of a price growth leader—with its McCafe specialty coffees and fruit smoothies gaining some serious sales traction.
Sales have grown at double digit rates in the past couple of quarters, something not always seen in mature, established large caps. Its yield is currently 3%, another factor that’s added to the stock’s attractiveness at a time when many investors are turning to dividend-paying equities rather than Treasuries.
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Technically, McDonald’s is currently in buy range, getting solid ten-week support, and showing below-average trade on its retreat. That’s an indication that fund managers have been hanging on to shares, rather than unloading, signaling their confidence in the company.
Finally, Panera Bread (PNRA) rallied to an all-time high Tuesday, before pulling back intraday. The stock gapped more than 15% higher in late October, after topping quarterly views and raising its outlook. After holding those gains for a few weeks, it gapped higher again on Monday, as the general indices notched healthy price gains.
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Its most recent price consolidation was constructive. The stock shed 28%, and undercut the low of the prior consolidation. Such price action often flushes out investors lacking in conviction, and attracts bargain hunters.
Like McDonald’s, Panera constantly updates its menu, and is known for its operational efficiency. Operating cash flow increases are often found in strong price leaders; this metric for Panera has increased for four years in a row.
The stock is currently in a technical buy range. Ideally, volume would increase as the stock reverses higher again.
At the time of publication, Kate Stalter did not own positions in any of the stocks mentioned in this story.
