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Burger Stocks: The Bubble Has Burst, and One Clear Winner Has Emerged

Burger stocks exploded last year. It started with the IPO of Shake Shack (SHAK) in January, an offering that was priced at 21, but began trading at 47. It was fueled by lots of hype about trendy private chains, like Five Guys, In-N-Out Burger, Whataburger, Umami Burger and Iron Chef Bobby Flay’s Bobby’s Burger Palace.

Remember the Burger Bubble of 2015?

Burger stocks exploded last year. It started with the IPO of Shake Shack (SHAK) in January, an offering that was priced at 21, but began trading at 47.

It was fueled by lots of hype about trendy private chains, like Five Guys, In-N-Out Burger, Whataburger, Umami Burger and Iron Chef Bobby Flay’s Bobby’s Burger Palace.

And it peaked when SHAK hit 96.75 in May, notching a gain of 361% from its IPO price. At the peak, the stock’s forward P/E ratio was in the neighborhood of 300! And that’s for hamburgers—not exactly revolutionary products!

By June, the stock had pulled back to (and broken down through) its 50-day moving average, and I wrote about it here, warning about the potential deflation of the bubble. Here’s what the chart looked like then.

At the time, SHAK was trading at 69, but the fall through its 50-day moving average after its tremendous advance signaled that support for the stock was fading fast and suggested the decline could go much further.

Well, SHAK finally bottomed at 30 in late January, and today it’s trading around 38.

So is it a bargain?

Given that earnings are expected to grow 15% this year and 26% next year, and the forward P/E ratio is still a very high 101—and that the chart shows no positive momentum—my verdict is no.

As to the other contenders in the burger stock industry:

Burger Stock #1: Red Robin Gourmet Burger (RRGB) is down 33% from its highs of 2015 and its chart is no more attractive than SHAK’s.

Burger Stock #2: Sonic (SONC) actually has an attractive chart here, in part because investors did not bid it up in the excesses of 2015. Earnings are expected to grow 24% this year while the forward P/E ratio is just 26. Growth-minded investors who like burgers could investigate.

Burger Stock #3: Wendy’s (WEN) is neither weak nor strong. What’s most shocking to me is that revenues at the chain have decreased (on a year-to-year basis) for the past nine quarters! Yes, management has been able to grow earnings in the past three quarters by cutting costs, but if that revenue trend keeps up, there will be trouble!

The Best Burger Stock: McDonald’s (MCD)

Last but not least is the king of burgers, McDonald’s (MCD). Like Wendy’s, McDonald’s has been coping with declining revenues (seven quarters in a row!). And like Wendy’s, it’s managed to grow earnings over the past three quarters by cutting costs. But unlike Wendy’s, McDonald’s actually has a strong chart!

The McDonald’s chart is telling us that investors believe management’s recent moves (to all-day breakfast offerings and the removal of artificial ingredients from Chicken McNuggets, for example) will bear fruit, that the stock’s valuation (a forward P/E ratio of 23) is reasonable, and that the 2.8% dividend is worth hanging around for.

For risk-averse investors, it’s worth checking out.

Comparing Apple Stock to IBM and Microsoft (MSFT)

Apple (AAPL)
Apple gets a lot of ink, and I’m generally not eager to add to it; I’d rather steer you to attractive investments (on both the growth and value side) that people are not aware of. The best opportunities are found where other investors are not looking.

But in the wake of Apple’s colossally disappointing earnings report last week, I feel inspired to once again explain some basic investing concepts, particularly as they relate to the best, most popular stocks.

1. A stock goes up when perceptions of the company improve; the increased buying power generally sends the stock higher over time.

2. In the cases of the very best growth stocks (in my lifetime these have included IBM, Microsoft, Cisco, Broadcom and Apple), the stock climbs until everyone who might possibly be an investor in it owns it.

3. At the peak, there is no way for perceptions to improve further. (Think of Apple last year.) More important, there are no more potential buyers of the stock!

4. Thus, when the company disappoints in some way (eventually, they always do), and some investors begin selling, there is not enough appetite for their shares, and prices fall.

5. And because trends tend to last longer and go further than investors originally expect, the stock’s decline lasts a long time—and takes the stock down to unimaginable depths!

I last wrote about this phenomenon back in February, after Apple reported that iPhone sales growth had been slowing and the stock gapped down in response. And I compared Apple’s trajectory to those of IBM and Microsoft, its predecessors in the technology leadership group.

Here’s a passage worth repeating.

“Once IBM stock began its downward trek from the world’s favorite stock to a has-been, it took six years to complete that journey. At the end, it had lost 77% of its value!

“For Microsoft the numbers were similar. The downtrend lasted nine years (!) and took the stock down 72%!

“If Apple were to fall 75% (the average of those two) from its high, how low would it go? I hate to even print this, because the number will look so very low, but the answer is 34!”

So, do I hate Apple? No, I think Apple is a great company and I love Apple’s products. Every day I use my iPhone, iPad and MacBook Pro. If I wore a watch, I’d probably wear an Apple Watch. But I learned long ago not to confuse the company or its products with the stock.

The bottom line is that the weight that is pushing AAPL down will continue to grow, as more and more growth investors wake up to the fact that even a yield of 2% is not enough to compensate for the growing losses produced by a falling stock.

So I’ll conclude by saying what I said back in February.

Sell Apple.

And then invest in the next Apple.

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Tim Lutts


Timothy Lutts is Chairman and Chief Investment Strategist of Cabot Wealth Network, leading a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems.