Three restaurants stocks continue to stand out as the best of the best, especially in tough times. And while the novel coronavirus crisis caused carnage everywhere, restaurant stocks were especially hurt. Thousands of smaller operations will not survive this disruption, but these large-cap companies will fare better than others. In fact, of the three we discuss today, one stands out as unscathed by the hurdles that this virus imposed.
In spite of the horrendous state of global affairs, the stock market has recovered reasonably well so far. Many pundits say it was too well. In fact, the NASDAQ Composite is a stone’s throw away from its all-time highs. This week, there is tremendous appetite for risky stocks like Shopify (NYSE:SHOP), Beyond Meat (NASDAQ:BYND) and Twilio (NYSE:TWLO). These are not what investors buy when scared — and quite frankly, this is a puzzle because the global situation is still dire. Yes, some areas are reopening, but this is a gradual and slow process that may take months assuming all goes right.
If any state experiences a set back with infection rates, this exuberance will disappear quickly. Wall Street may be putting the cart before the horse here, and this is coming from an optimistic investor. In 2019, I correctly preached the bullish thesis in the face of all the trade war corrections.
This is all to say that with the three companies we’re discussing today — even though they make for excellent restaurant stocks — I have to temper the enthusiasm inside this mucky macroeconomic situation. In spite of all the trillions of dollars that governments are spending to re-inflate their economies, the results are not guaranteed. What just happened has never happened before. Almost no one on the face of the planet has worked anywhere but their homes in months. The loss of momentum was tremendous, and the indices made revert lower once more.
Enough worry, though. Let’s get down to business! Here are the three restaurant stocks:
With all of that in mind, let’s dive in.
Restaurant Stocks Surviving Coronavirus: Chipotle (CMG)
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I will start with the best of the best restaurant stocks.
CMG stock has proven time and again that it is formidable. In April, it set a new monthly closing high. Management just reported earnings on April 21, and they blew it out of the water under unprecedented tough conditions. The comparable sales that they delivered in spite of having store shut down were just amazing. Therefore, it’s no surprise to see the stock so close to his all-time highs while others are stuck in muck.
Nevertheless, this is not an obvious place to start new longs with great conviction. As much as I like owning the shares, the better spot would be to do so after on a swoon towards $760 per share. It has support starting at $800, so anywhere in that zone would make for a fine entry point. This gives the Chipotle bulls the chance to build more momentum to re-attack the neckline near $910 per share. If they are able to close above it, they would restart another rally to exceed $1,000 per share.
Markets in general are too high, so I think it’s logical to risk missing out on a little bit of upside to find a better entry point. However, I want to re-emphasize my belief in this stock for the long-term. Management has proven itself time and again.
McDonald’s (MCD)
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For a period of time last year, McDonald’s looked like a champion. It rallied more than 50% from the March 2018 lows, but it all ended in a double-top two months ago. MCD stock did try to recover old glory in February of this year, but then the coronavirus pulled the rug from underneath the bulls. The correction from top to bottom was around 40%.
Luckily for the bulls, they were able to recover most of it very quickly. Around $180 per share now, McDonald’s is inside the most pivotal area for the past three years. These tend to be sticky, meaning investors will want to fight it out hard there. This creates congestion, and could provide enough support for the bulls to gather their steam and get higher in the short-term. There is even secondary band of support $10 lower.
The immediate buyers will step in at $172 per share, even at the risk of filling the gap $10 below that. The upside, bullish trigger would be to chase the breakout above $193 per share. But first, investors must decide on time frame. Long-term, this is a stock to own with confidence and not to worry much about the short-term gyrations. So relatively speaking, this is a better starting point than CMG stock here.
Those who already are long the stock are okay simply weathering through the storms and waiting for the longer-term reward. Management is competent enough and their operation is diverse enough that they can manage through the giant problems better than most of their competitors.
Starbucks (SBUX)
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Starbucks is the one of the three that worries me the most today. Not so much from the perspective of its stock, but rather from some of the commentary I hear. It seems like they’ve already accepted the fact that they will have to change the way they do business forever. I always get nervous when a successful formula changes too soon. But other than that, I like buying dips on SBUX stock.
Like McDonald’s, it was hurt badly in February from the virus crisis. But its troubles started a few weeks earlier with their January earnings report, as it fell 10% on that. After a brief bounce, SBUX stock fell about 40% from top to bottom due the virus. But it also recovered half of it, and is trying to build a base for more. The stock has support above $69 per share, so ideally an entry point anywhere near that makes sense for the mid and long-term. The bullish breakout happens if buyers can take the stock above $80 per share because that would invite more buyers. And if they can break through the resistance — which lies $2 above that — they can have a shot at the January highs.
None of this will happen easily. Every ledge lost on the way down will become resistance on the way up. You’ve heard it said “prior support becomes forward resistance,” and this is exactly what it means. Furthermore, the assumption is that this global reopening process goes with very few hitches and glitches. That said, Starbucks will serve as a good test of that with its China operation. The news updates from that will be critical.
Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here. As of this writing, he did not hold a position in any of the aforementioned securities.
