Three Tasty Picks in Dining Sector

01/19/2011 12:02 pm EST


Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

This trio is holding its gains while the herd grazes elsewhere, writes Joseph Hargett of Schaeffer’s Investment Research.

While Wall Street's confidence in consumers continues to grow with practically every economic report, there is not much faith in retail stocks. In fact, analysts at a recent Barron's Roundtable were mostly "neutral" on these names for 2011, despite retail being one of the best-performing sectors of 2010. What's more, the restaurant and casual dining stocks within the sector appear to be doubly overlooked, given the wealth of investor pessimism amid strong technical backdrops.

For instance, the PowerShares Dynamic Food & Beverage ETF (NYSEArca: PBJ) has rallied more than 27% during the past 52 weeks, compared to the S&P 500 Index's (SPX) gain of roughly 11.5% for the same time frame. Technically, the ETF has rallied steadily along support at its ten-week and 32-week moving averages since the March 2009 bottom. What's more, the ETF has toppled long-term resistance at the $18 level, a region that created a ceiling for PBJ between April and June in 2007. The area should now provide a springboard of support for the ETF.

Despite this strong price action, investors remain quite bearish on PBJ. For instance, 184, or 83%, of the 337 ratings on PBJ holdings are "holds" or worse, according to Zacks data. Furthermore, short interest on the ETF has rocketed nearly 500% higher during the most recent reporting period. Should the ETF continue to push higher, we could see these bears abandon their losing positions, resulting in a significant tailwind for the sector.

Not Sweet Tooth for Cheesecake
The Cheesecake Factory (Nasdaq: CAKE) shares have outperformed handily during the past 52 weeks, soaring more than 45%. This strength has waned in recent weeks, but the stock has pulled back to potentially stout support in the $30-$31 region.

Despite this strong price action, investors are having a hard time accepting the stock's current uptrend. Among options traders, the stock's Schaeffer's put/call open interest ratio (SOIR) arrives at 1.36, as puts outnumber calls among near-term options. What's more, put buying is growing in popularity on the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE), as nearly three puts were bought to open for every call purchased during a recent two-week window.

Analysts are also betting against CAKE, with 19 of the 27 brokerage firms following the shares rate them a "Hold" or worse. Finally, short interest accounts for a sizable 14.8% of the stock's total float. Should the recent short-covering trend gain momentum, it could provide additional fuel for the equity's rally.

Chipotle Warming Up
Another restaurateur with excellent bullish prospects is Chipotle Mexican Grill (NYSE: CMG). CMG shares have rallied more than 162% during the past year and has bested the Standard and Poor's 500 index by nearly 16% during the prior 60 trading days. The shares have rallied steadily along support at their ten-week and 20-week moving averages since December 2009, surging past the psychologically significant $200 level in the process. Currently, the shares are in the process of rebounding from support in the $210-$215 region, which is currently home to CMG's rising 80-day moving average.

On the sentiment front, there are plenty of CMG bears that could be shaken out of their short positions should the shares extend their current rebound.  There is also room for potential upgrades on CMG. According to data from Zacks, 15 of the 25 analysts following the shares still rate them a "Hold."

Don’t Sour on Brinker
One final dining stock to consider is Brinker International (NYSE: EAT). Its flagship Chili's Grill & Bar chain boasts more than 1,450 outlets, and trails only Applebee's as the largest full-service restaurant chain.

The company has attracted some bullish attention from the brokerage community recently, with Buckingham initiating coverage on the stock with a "Buy" rating on Jan. 3. Checking in with the rest of the brokerage bunch, however, we find that Buckingham is in the minority. In fact, Zacks reports that 15 of the 21 analysts following the shares rate them a "hold" or worse. This configuration leaves ample room for upgrades that could provide additional buying pressure for the security.

The stock is on solid footing, having rallied more than 47% during the prior 52 weeks. This rally has placed EAT above formerly stiff resistance in the $20-$21 region, an area that had capped the shares since June 2008 until their breakout in early December. Additionally, EAT enjoys the support of its ten-week and 20-week moving averages, which have ushered the stock higher since August.

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