In early November, three restaurant stocks were worth trading for the month. They all delivered and now it’s time to consider them again going into 2020. The three stocks that stand out again are Chipotle (NYSE:CMG), McDonald’s (NYSE:MCD) and Starbucks (NASDAQ:SBUX). These are three great American companies that are shining on the global stage.
The equity bulls are still in control of the overall price action on Wall Street. This is the complete opposite of this time last year when markets were falling off a cliff. Nothing has changed on the economic war between the U.S. and China. But the difference has been the Federal Reserve. Under the leadership of Jerome Powell, the U.S. Fed has recommitted to the dovish side. They are now cutting rates and have signaled that they are willing to tolerate some increases in inflation. They are even engaged in a quantitative actions even though they insist on it not being a QE.
Of the three restaurant stocks today, CMG stock is the star up 86% this year. SBUX comes in second place up 35%, beating the S&P 500 by 10%. MCD stock is dead last but still up 16%. So these are winning stocks that are still in favor on Wall Street. Each has opportunities to trade into next year. Fundamentally they are all sound, so the traders among us can read the charts for the proper setups.
With that in mind, let’s take a closer look at each stock.
Restaurant Stocks to Trade Into 2020: Chipotle (CMG)
In early November, the upside opportunity for CMG stock was at $785. From there, the bulls surged higher and filled the earnings gap all the way to the ledge at $830 per share. From here, it is much harder work for the bulls to climb higher and even ultimately set a new high. Luckily the buyers have momentum on their side as CMG is setting higher lows as it knocks on the resistance here.
If the Fed doesn’t cause a debacle on Wall Street this week, then odds are good that CMG stock could set a new all-time high. It could even come close to $900 per share. Although nothing is guaranteed, usually momentum stocks don’t correct without reason while the indices are rising. Nevertheless, it is important to note that this incredible 13% rally since early November has created a steep rising wedge. And those cause the ticker to be susceptible to corrections. Fast gains make for weak hands in the short term. The new froth needs to correct a little to create a better base for future gains.
As long as Chipotle stock stays above $790 per share, the bulls are in control of the price action and new highs will come. It’s up to CMG’s management to sustain the strong comparable sales report. So it goes without saying that the company needs a quiet headline period to set new highs.
McDonald’s (MCD)
MCD did not take full advantage from markets making new all time highs because it had a shake up in the c-suite. The company ousted CEO Steve Easterbrook and his head of human resources, so the stock lost momentum around its earnings report while the indices were soaring. But eventually the stock will shrug off any uncertainties around the new management issues. Apple (NASDAQ:AAPL) stock thrived after the untimely death of its founder Steve Jobs, so MCD stock will recover post Easterbrook.
McDonald’s stock has not yet recovered from its 15% correction. Luckily the slide came from a new high that it had set earlier this year. Since then, it has consolidated for weeks while setting higher lows. This gives the bulls time to create a solid foundation. In addition, MCD stock has also been attacking a neckline near $197 per share. So as soon as the bulls succeed in breaching it, they will overshoot to fill the earnings gap at $208 per share. There will be resistance at $200, but with the help of the general markets and a dovish Fed event, this week could be pivotal for MCD stock.
Long term, the stock is a buy. But today’s note is that there are also the additional short-term trading opportunities. Should the equity markets trip this week, then MCD may need another dip to reset another try at that neckline. It is also important to note that $186 per share is a weekly pivot zone and that the bulls have it as support. But if it fails, then it could trigger a bearish pattern to bring about a 7% drop from there. For what it’s worth, consensus is that management is putting technology to good use and their stores seem more efficient. This usually translates into better operating results.
Starbucks (SBUX)
Starbucks stock had a great year until it tripped in September. The momentum started to fade from the July earnings report. But it wasn’t until Sept. 9 that it fell hard into a 15% correction. It has yet to recover a meaningful portion of it. However, the bulls have established a bottoming pattern just above $81 per share. So now they have the momentum of setting higher lows as they attempt to breakout from $87 per share where they have been failing for the last six weeks.
But therein lies the opportunity.
If SBUX stock rises above the neckline then it would invite momentum buyers to fuel the rally. It can then extend all the way up to the September ledge. There will be significant resistance near $92 per share. Near $100, most experts loved it, and as it starts rising again, maybe it can draw a few of them back in. This outcome would be so much easier if the equity markets in general continue on setting new highs this month and into an impressive Santa Claus rally.
Since the opportunity in early November, the stock made tremendous headway and now the setup is to ignite the second leg of the recovery process. Good bottoms take time to develop, so there is no rush here. As long as SBUX stays above $83, the bulls will remain in control of the short-term price action. Long term, SBUX has a healthy business model upon which they can build more upside. People are not going to quit drinking coffee so their base is solid. This is the kind of business that Warren Buffet loves.
That aside, today’s setup is more short term, so it is important to stick to tight stops unless the intent is to enter long-term positions. The options markets also offer dozens of ways to profit from SBUX price action without any long-term commitment. But generally speaking, big dips in the stock are usually buying opportunities and so far, the one that happened in July has turned out to be a winning trade.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
