Ruth Hospitality: Dining for Dollars

01/30/2018 5:00 am EST

Focus: CONSUMER

Joe Duarte

Editor, Joe Duarte In the Money Options

The restaurant sector has been a market doormat for the past couple of years. Earnings and revenues have been reduced by decreasing store traffic, complaints of poor and low quality offerings, and a general tendency of consumers to keep their wallets closed due to economic worries, notes Joe Duarte, editor of In the Money Options.

However, the Trump tax cut, at least for now, may have changed these things in the eyes of investors who seem to be flocking to the sector.

chart 1

A look at the recent breakout in the PowerShares Dynamic Food and Beverage Portfolio (PBJ) illustrates the sudden appeal of this sector to investors. Perhaps the most reassuring indicator is the very positive slope of the On Balance Volume (OBV) indicator, even as the Accumulation Distribution (ADI) remains neutral.

I attribute this slight divergence to the fact that this is a somewhat thinly traded ETF, which I am using as an illustrative instrument. Under the hood there is a split in the restaurant stocks, with the high end currently outperforming the lower end in most cases.

chart 2

A perfect example is a stock I recently recommended, Ruth Hospitality Group (RUTH) an upscale operator of steakhouse restaurants.

RUTH is as upscale as it gets, offering a wide variety of steaks, chicken, and sea foods, along with high end appetizers and desserts all to be washed down with premium liquor and wine. The average ticket for a family of four can exceed $300, and the average sales volume for a single restaurant is around $5.5 million per year.

Given the general positive tone of the sector and the perception that the economy is about to accelerate, I would expect, that barring a major external event causing a major selloff in stocks, RUTH has the potential to move to the $26-$28 area in the next few weeks to months.

The company is expected to report Q4 earnings on January 31, with consensus estimates pegged at 0.38 per share. Meanwhile, The stock is under accumulation (positive OBV and ADI) and has recently broken out to a new high.

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