Why Does the Market Hate Fast-Food Stocks?

by James Brumley | October 4, 2012 8:49 am

If you’re an owner of a fast-food stock like McDonald’s (NYSE:MCD[1]), Wendy’s (NASDAQ:WEN[2]), Yum! Brands (NYSE:YUM[3]), and Burger King Worldwide (NYSE:BKW[4]), then 2012 hasn’t been a very fun year for you.

While the market is up 15% year-to-date, stocks for those burger joints are in the red … and in some cases, in the red by a lot. McDonald’s stock is off 10% since the end of last December, Burger King is trading below its June IPO price, and Wendy’s shares are in the hole by 21%. YUM shares are the only ones up for the year, but even they’re still off by 9% since their March peak.

What gives?

The Good News Is …

To fully appreciate the answer of what’s going wrong for the likes of Burger King and McDonald’s, investors also need to understand what’s going right. Fast-food chains are …

So what, pray tell, is driving these stocks downward? More than anything, fear about the future is crimping fast-food stocks.

Uh-Oh

As is typically the case, some fears are overblown, while other potential pitfalls are being recklessly overlooked. Either way, there are three key worries bouncing around inside investors’ heads right now.

Bottom Line

So which is it? Is the market right about fast food’s looming pitfalls, or are the quick-service restaurants on the right growth path?

As always, the truth is somewhere in the middle. In terms of value, though, investors seem to have errantly priced in a worst-case scenario that likely won’t play out. Traders might want to take advantage of the dip rather than fear it — there’s not much fast-food businesses are dealing with now that they haven’t survived before.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Endnotes:
  1. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  2. WEN: http://studio-5.financialcontent.com/investplace/quote?Symbol=WEN
  3. YUM: http://studio-5.financialcontent.com/investplace/quote?Symbol=YUM
  4. BKW: http://studio-5.financialcontent.com/investplace/quote?Symbol=BKW
  5. unveiled its Cantina Bell menu: http://investorplace.com/2012/10/before-laughing-at-einhorns-taco-bellchipotle-theory/
  6. CMG: http://studio-5.financialcontent.com/investplace/quote?Symbol=CMG
  7. its workers are demanding more pay: http://investorplace.com/2012/09/china-isnt-easy-money-anymore-yum-coh-gps-sbux-nsrgy-bby/
  8. Supreme Court (mostly) upheld the new health care laws: http://investorplace.com/investorpolitics/heres-the-effect-of-obamacare-on-your-investments-in-just-1-sentence/
  9. United States’ drought: http://investorplace.com/2012/08/5-ways-the-drought-could-dry-up-you-wallet/

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