Tasty Trade Idea: Ruth Hospitality Group in a Recovering Sector

01/24/2018 2:00 pm EST

Focus: STOCKS

Joe Duarte

Editor, Joe Duarte In the Money Options

Trade idea: Ruth Hospitality Group, an upscale steakhouse restaurant chain. The stock is under accumulation and has recently broken out to a new high, asserts Joe Duarte, MD of Joe Duarte In The Money Options. He’s traded, analyzed and written about markets since 1990.

Politics aside, until proven otherwise, we are in the midst of one the most remarkable momentum runs in the history of the stock market. And because momentum runs offer the best opportunity to make big money in short periods of time, reasonable investors should be aware of the political situation but concentrate the bulk of their energies on their stock holdings. 

So what’s out there to watch beyond your stocks this week? You name it, and it’s there as the week is full of central bank meetings, as in the Bank of Japan and the ECB, the annual Davos World Economic Forum conclave, and lots of economic data to be released such as the Treasury offering, or perhaps delayed in the U.S. due to the government shutdown. Still, through it all, the momentum in the stock market still gets the benefit of the doubt. 

Market breadth remains bullish 

It’s good to know what your odds of success in owning stocks might be at any moment, which is why my main indicator is the New York Stock Exchange Advance Decline line (NYAD) the best gauge of the market’s overall direction for the past eighteen months. 

And the news is still good. Last week, as the volatility in the market increased, the NYAD held its own. 

Here is the bottom line. 

First, NYAD remained above its 20-day moving average despite rolling over slightly. This rolling over, for now, remains a short-term move. If it can remain above this key support level (20 day MA), the odds favor a return to the recent long-term uptrend. 

Second, the Relative Strength Indicator (RSI) indicator, which measures the overbought-oversold status of the NYAD, is slowly falling without the overall NYAD crashing. This is a sign that the line and the market are taking a rest while not stalling out. 

Third, the rate of change (ROC), a measure of momentum remains above the zero line, another sign that this is a short-term consolidation. 

What’s the worst case scenario here? If the market gets spooked, I would expect a move in NYAD down to the lower Bollinger Band (BB- lower dark blue line surrounding NYAD). If the long-term trend remains intact, a move to the lower BB would likely precede yet another rebound, similar to what we saw in March, May, August and November 2017. 

Restaurant stocks to dine on 

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. But 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. 

A look at the recent breakout in the PowerShares Dynamic Food and Beverage ETF (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 indicator (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. 

A perfect example is a stock I recently recommended on In The Money Options, 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 seafood, 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. 

The stock is under accumulation (positive OBV and ADI) and has recently broken out to a new high. 

Given the generally 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. 

It’s a market of stocks 

Aside from the potential for short-term volatility and perhaps even a moderate correction brought on my profit taking, the odds favor a continuation of the bull market for now. Moreover, we may be in one of those periods where stock picking outperforms passive investing. As a result, investors should keep an eye on politics and external factors while focusing their energies on companies with positive macro influences, positive price charts, and high levels of execution. 

I own shares in RUTH as of this writing and I love their shoestring fries. 

Joe Duarte is author of Trading Options for Dummies, now in its third edition. He writes about options and stocks at www.joeduarteinthemoneyoptions.com