The stock markets opened the week by hitting new at all-time highs Monday. Yet some of the stocks that led a long while this year are now lagging. And at the top of the list are three restaurant stocks.
As such, today I’m examining examine three restaurant companies that are off their highs but still have the potential to reset rallies.
The three restaurant stocks that have lost their 2019 luster are Chipotle (NYSE:CMG), McDonald’s (NYSE:MCD) and Starbucks (NASDAQ:SBUX). Earlier this year, all three had insane rallies on Wall Street. The Street’s consensus was so strong that these stocks drew in buyers even to unlikely levels. But the mania has since abated, so they are now well off their highs.
All three have fallen back closer to neckline levels for their breakouts, which has made them attractive once more.
Restaurant Stocks to Trade: Chipotle (CMG)
I am not a fan of the valuation for CMG stock. It is unreasonably priced for a restaurant. It sells at a trailing price-to-earnings ratio of 67, which is higher than Amazon (NASDAQ:AMZN) for absolute relativity and almost triple that of MCD. So any which way you slice it, CMG is a bloated stock that should be cheaper.
The only reason that investors allow this sort of valuation is usually when they foresee tremendous upside potential. Meaning buyers of CMG stock now expect it to have much higher sales in the future to reset the metrics. Recently, management has fed the hopium by delivering double-digit comp sales reports. This is the fuel to the fire in Chipotle stock. Those who short it against this performance are at risk of losses.
Technically, if CMG loses the $752 per share area, it becomes vulnerable to a bearish pattern that could bring about a 10% correction. There is interim support near $715, but there have also been so many fast profit levels that a tumble could gather extreme downward speed. If the markets in general correct, CMG could then even fill the gap at $550 that the bulls left from the February earnings.
While this is not a forecast, it is a viable scenario that exists.
Conversely, the upside opportunity is if the bulls can retake the $785 zone and rebuild momentum into a new high. There are resistance levels at every ledge like the one at $833 per share. The equity markets are healthy and for as long as CMG comps are strong, the stock is headed higher.
While markets set a new all-time high record, MCD found a way to create its own headlines by announcing the departure of the CEO Steve Easterbrook and his head of human resources. The stock fell 3% on the headline. Such events usually don’t have lasting effects on the stock long term.
Yes, the CEO is integral to the success of MCD, but the plans that are in place do not stop just because one person leaves the company. If Apple (NASDAQ:AAPL) stock can make new highs after the untimely death of its founder Steve Jobs, MCD stock will be fine without Easterbrook.
Technically, McDonald’s stock soared to new highs in August only to suffer a 15% correction. The upside benefit of this is that it is now closer to the 12 month point-of-control. These are often support levels, so the bulls will have a chance to stop the slide. These are not hard lines in the sand but going long MCD stock here makes sense, especially if you take smaller bites rather than a full-sized position.
Fundamentally, MCD stock is not cheap as it sells at P/E of 25 and seven times sales. So from that perspective there is always fat to trim off the stock price. But there is a zone of technical support to help the bulls flip the momentum to the positive.
I know that SBUX is not a typical restaurant stock, but it is close enough to belong in today’s write up. The rally into the $100 per share peak on the July earnings report was impressive. Perhaps too impressive because since then, it has fallen into a 17% correction of lower-highs and lower-lows without any serious effort to stabilize. In addition, this correction happened while markets have set new highs.
But now, near $80 per share, there is a major pivot level where the bulls can make a stand. But it is not a concrete floor since it too has had fast profits from the June bottom. Nevertheless, it qualifies as a potential support zone.
So for those looking to go long SBUX stock, this is as good a time as any for a starter position. If it falls further to $78, then I would add a little more. Or I could use the options markets to sell puts or put spreads to get long SBUX with a buffer zone to boot. Ultimately, SBUX has a history of winning for its fans. This dip from the highs is deep enough to consider some risk into it to the upside.