Year-to-date gains: 83%
First up, we have The Wendy’s Co. (WEN) — a fast-food stock that has gained more than 10 times supposed king McDonald’s and more than four times the broader market. One big reason for the restaurant’s success: Its new Pretzel Bacon Cheeseburger.
My personal take on the snack: Delicious, although a bit overpriced. That higher price tag, though, is part of the company’s strategy of offering premium items a la Panera (PNRA) and Chipotle (CMG) — a recipe for higher prices and margins.
The bad news, though, is that the company’s sales have been soft. They fell short in the most recent quarter, while same-store sales only inched up 0.4% in North America. Margins have made up the difference thus far, but may not do the trick as investor expectations get higher.
Sure, WEN has soared 83% year-to-date and was just upgraded to a “buy” from Argus, with $10 price target — double-digit upside. But the stock’s median target remains at $7.50 — double-digit downside and proof of just how fast WEN has run-up.
In fact, the stock is currently trading for 32 times forward earnings — double projected five-year annualized earnings growth and far more than McDonald’s, Taco Bell and KFC operator Yum Brands (YUM) and Burger King Worldwide (BKW). With that in mind, Wendy’s stock indeed seems ripe for a cool-down — especially as investors demand more for the high premium they’d be paying, and the novelty of the new item wears off.